Gresham’s law is a principle that if two currencies have the same legal value but different intrinsic values are in circulation at the same time, the currency with the lower intrinsic value will eventually drive out of circulation the currency with the higher intrinsic value because people will hoard the “good” money and spend the “bad” money. However, intrinsic value can be a subjective and complicated concept.
During the Great Debasement under the reigns of King Henry VIII and Edward VI, the precious metal content of gold and silver coins was significantly reduced to raise money for the crown. Although he was not the first person to put forth the principle, in his letter to Queen Elizabeth I upon her accession, the principle’s namesake, Sir Thomas Gresham, advised the Queen that such debasement drove older coins outside of England while the newer coins remained in circulation. Similarly, roughly 1,500 years earlier, during the reign of Emperor Nero (54-68 CE), and again 200 years later (235-284 CE), the Roman Empire lowered the silver content of its currency, prompting its citizenry to hoard older coins.
The principle has also been used in the context of a bimetallic monetary system where the ratio of gold to silver value set by the government is out of sync with ratios set by other nations or established in international marketplaces, and in the context where the metal content of the coin has an intrinsic value greater than its legal value. In each of these scenarios, the “bad” coins will remain in circulation whereas the “good” coins will be removed from circulation.
It has, however, also been observed that, under Thiers’ Law, it may not apply to unstable currency systems where the purchasing power of the “bad” domestic money becomes significantly less than the purchasing power of a “good” foreign currency.
Gresham’s law is implicated when there is an imbalance between a coin’s intrinsic value and its legal value. Coins struck to a fixed weight and purity, but without an assigned legal value, such as the medieval Florentine florin, trade purely by weight and metal content, the way bullion or bar gold does today. Since there’s no legally fixed exchange value, Gresham’s Law is not applicable.
References
“Gresham’s law,” Wikipedia, https://en.wikipedia.org/wiki/Gresham%27s_law
“Antoninianus,” Wikipedia, https://en.wikipedia.org/wiki/Antoninianus
“Gresham’s Law,” Study.com, https://study.com/academy/lesson/greshams-law-overview-history-theory.html
John Munro, “Money, Prices, Wages, and ‘Profit Inflation’ in Spain, the Southern Netherlands, and England during the Price Revolution Era, ca. 1520–ca. 1650,” University of Toronto Department of Economics, https://www.economics.utoronto.ca/munro5/MONEYLEC.htm