Gresham's law

In economics, Gresham's law is a monetary principle stating that "bad money drives out good". For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will gradually disappear from circulation. The law was named in 1860 by economist Henry Dunning Macleod after Sir Thomas Gresham (1519–1579), an English financier during the Tudor dynasty. Gresham had urged Queen Elizabeth to restore confidence in then-debased English currency. The concept was thoroughly defined in medieval Europe by Nicolaus Copernicus and known centuries earlier in classical Antiquity, the Middle East and China. Under Gresham's Law, "good money" is money that shows little difference between its nominal value (the face value of the coin) and its commodity value (the value of the metal of which it is made, often precious metals, nickel, or copper). The price spread between face value and commodity value when it is minted is called seigniorage. As some coins do not circulate, remaining in the possession of coin collectors, this can increase demand for coinage. On the other hand, "bad money" is money that has a commodity value considerably lower than its face value and is in circulation along with good money, where both forms are required to be accepted at equal value as legal tender. In Gresham's day, bad money included any coin that had been debased. Debasement was often done by the issuing body, where less than the officially specified amount of precious metal was contained in an issue of coinage, usually by alloying it with a base metal. The public could also debase coins, usually by clipping or scraping off small portions of the precious metal, also known as "stemming" (reeded edges on coins were intended to make clipping evident). Other examples of bad money include counterfeit coins made from base metal. Today virtually all circulating coins are made from base metals, known as fiat money.