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> It’s also worth understanding Gresham’s law, which proposes that “bad money drives out good”. Given the choice between two currencies, most people spend the w
by paulgb 5y ago
> It’s also worth understanding Gresham’s law, which proposes that “bad money drives out good”. Given the choice between two currencies, most people spend the weaker one and hoard the stronger one.
Eh, that's not really Gresham's law, which applies when there is a fixed (by law) exchange rate between two currencies.
Quoting Hayek’s Denationalization of Money, “What Jevons, as so many others, seems to have overlooked,
or regarded as irrelevant, is that Gresham's law will apply only
to different kinds of money between which a fixed rate of
exchange is enforced by law.” (Emphasis his)
- Geee 5y agoTrue. What actually happens, is the opposite, known as Thier's law[0]: "Good money drives out bad". When given free choice (free competition between currencies), people prefer to accept the good money, which eventually drives out the bad money from circulation. Or more clearly, the bad money loses demand and therefore its value. [0] https://en.wikipedia.org/wiki/Gresham%27s_law#Reverse_of_Gresham's_law_(Thiers'_law https://en.wikipedia.org/wiki/Gresham%27s_law#Reverse_of_Gre...)
- cf141q5325 5y agoYou dont disagree with the author. The key phrase is "given the choice" from the consumer perspective. That people who sell will demand the stronger if they have the option isnt surprising.
- paulgb 5y agoWith a free-floating exchange rate, the buyer wants to use the weaker currency and the seller wants to accept the stronger one. The seller can set prices in each according to his preference, and the buyer can decide which to pay vs. which to save according to hers. The market will discover an exchange rate between the two currencies accordingly, but no economic law dictates that one will drive out the other. Gresham’s law applies when the seller is bound to a certain rate of exchange between the two currencies. The buyer will therefore pay in the currency she has the least desire to hold for the long term. As a result of everyone doing this, over time all trading will be done in the less-desirable currency.
- cf141q5325 5y agoYes, we dont disagree. In practice, you have to settle debts in the government dictated currency. Here Gresham takes hold, the valuable currency will disappear from circulation. Think silver dollars in the US with a higher material value then the nominal value. You still have to accept payment in any dollar so you wont spend silver dollars doing so. As long as you have the choice to sell it for material value. Think copper content in pennies for where this doesnt apply because its illegal to melt down. Its all just a description of how the market (meaning people ) behaves once the government applies pressure in certain directions.
- FabHK 5y agoFWIW, I found this instance indicative of the author's half-grasp of many economic concepts.