##  [Gresham's Law](/greshams-law-0) 

 Definition

When two forms of money are legally accepted at the same nominal value but differ in intrinsic or market value, the currency perceived as overvalued (the “bad” money) will tend to be used in transactions while the undervalued (“good”) money is hoarded, melted, exported, or withdrawn from circulation.

 

 

 

 

 

 





## Principle

Principle

If legal-tender or parity rules fix nominal values across monies while market values diverge, incentives cause agents to spend the overvalued medium and withhold the undervalued medium, reducing the circulation of the latter.

 

 

 

 

 





## Demonstration

Demonstration

Illustrative scenario — Situation: A jurisdiction treats two coin types as equal legal tender despite one containing more precious metal. Recognition: Market price for metal exceeds face value of the purer coins. Action: Households and merchants present the less-valuable coins in payments and retain the purer coins. Consequence: The purer coins disappear from everyday transactions and the lower-value coins dominate circulation.

 

 

 

 

## Misapplication

Misapplication

Interpreting the law as a moral claim that one currency is "bad" rather than as a behavioral outcome from legal parity and market-value differences; or applying it where currencies freely float with observable exchange rates rather than fixed parity.

 

 

 

 

 





## Consequence

Consequence

Circulatory composition shifts toward the overvalued medium; this can impair trust in money, complicate pricing, and, where persistent, incentivize official debasement or monetary reform to restore alignment between legal and market values.

 

 

 

 

## Reversal

Reversal

The effect does not obtain when currencies are convertible at market rates, when legal tender rules do not force equal acceptance, when transaction or conversion costs make hoarding unattractive, or when credible policy or expectation changes restore value parity.

 

 

 

 

 





## Boundary

Boundary

Clearly within: two legal tenders accepted at equal face value but with different intrinsic/market values. Boundary case: currencies pegged but with limited convertibility or transaction costs that moderate flows. Clearly outside: distinct assets or currencies traded at floating market prices without enforced parity; ordinary price inflation within a single currency.

 

 

 

 

 





## Semantic Tension

Semantic Tension

Legal parity and administrative rules (which fix nominal exchange) ↔ market value and private incentive to preserve wealth; the law operates where legal rules constrain market clearing.

 

 

 

 

 





## Synthesis

Synthesis

Gresham's Law is not a normative judgment about currency quality but an incentive statement: legal or regulatory parity combined with divergent market values produces predictable circulation outcomes unless conversion, price signals, or policy restore alignment.