Gresham’s Law is an economic principle stating that “bad money drives out good money.” It applies in situations where two forms of currency are in circulation, and one is perceived as having higher intrinsic value than the other.

Key Aspects of Gresham’s Law:

1. “Bad Money” and “Good Money”:
• Bad Money: Currency that has less intrinsic value (e.g., debased coins, fiat money with little backing).
• Good Money: Currency with higher intrinsic value (e.g., gold coins or currency fully backed by a valuable asset).
2. Mechanism of the Law:
• When both types of money are legally accepted at the same face value, people tend to spend the “bad money” and hoard the “good money.”
• Over time, “good money” disappears from circulation because people save it or melt it down for its intrinsic value.
3. Historical Context:
• Named after Sir Thomas Gresham, a 16th-century English financier, although the concept predates him.
• An example includes the debasement of coins in medieval Europe, where people hoarded the older, purer coins and spent the newer, debased ones.
4. Modern Applications:
• Gresham’s Law can apply beyond physical currency to other areas, such as cryptocurrency, financial markets, or any scenario where two competing goods have different perceived values.

It’s a critical concept in monetary economics, highlighting the effects of policies like debasement or inflation on the use of currency in an economy.