Gresham's Law

The simple way most Econ textbooks describe Gresham's Law goes like this: "bad money drives out good."

Sir Thomas Gresham, who lived in the 1500s, was talking about the composition of coins. Say a country has two types of coins in circulation, one that is pure gold and one that is gold plated over copper. Assuming both have the same face value, the copper amalgam would eventually become the dominant currency, according to Gresham's Law.

Since the components of the copper coins are cheaper, people will use it for trade, and hoard the gold coins (which might be worth more than face value, depending on the price of gold). Thus, the copper coins would circulate, and the gold coins would get stuffed into people's bustles or hidden under their chamber pots (this is the 1500s, after all).

The rule’s application doesn’t hold much application in its pure form today, because money is mostly printed on otherwise worthless paper or plastic. But there is some application in the currency market, as people decide which currencies to hold and which to spend.