Gresham's Law

Definition of the Law

Britannica Money¹ describes Gresham’s Law so: >…observation in economics that “bad money drives out good”. >More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation.

This is a common occurrence with coins issued by dictate (fiat), as they usually bear some imprint or stamp that denotes their “face value” and that can more-or-less reflect their actual market value. We can see a similar effect in countries that use currency notes from other countries as legal tender, as there tends to be a preference for “pristine bills” and their market-value is higher than wrinkled, ripped notes that have the same face-value.

The classic modern example of this is the steady debasement of US coins, eventually ending in cheap coining and dollar notes, while retaining the same purported face value.

Professional Coin Grading Service (PCGS)² describes: >The United States debased its coinage in 1838 out of necessity when it was found there was too much gold and silver in our coins. This made the coins worth more than their face value and encouraged their melting or export.

Gresham and Bitcoin

Gresham’s Law does not usually apply to the choice between using Bitcoin or fiat monies (such as the US Dollar), as Bitcoin is generally not legal tender in countries that have their own official currency.

The choice to prefer to spend Bitcoin or fiat during some particular transaction is not primarily dependent upon which has the higher market value to the listed face-value as they are two completely different currencies and not two competing versions of the same currency.

Fiat is simply easier to spend, in most cases, due to local regulations and payment systems.

Even those who only own Bitcoin sometimes convert it to fiat, in order to spend it. That is the opposite effect, as one would expect, under Gresham’s Law. ### Footnotes

1. Britannica Money: Gresham’s Law Retrieved June 16, 2024.↩︎

2. Debasement of Modern Circulating Coinage Published April 25, 2000. Retrieved June 16, 2024.↩︎