Gresham's law

As Gresham's Law, also known as Gresham's Copernican Act, the following economic principle is called: When a government undervalued a money places over another money places by law, the undervalued money places to leave the country or disappear by hoarding from circulation; the overvalued money places, however, is the circulation of money dominate. At the time of precious metal standards was often observed that " bad money drives good money out of circulation displaced " as a compulsory course for the ratio of good and bad money was determined by the authority. The law was formulated in the 16th century. It applies when there is for the payer choice whether payments in good, value-driven money or bad, less valuable money can be made, the receiving end but the bad money take the same course must like the good money.

Operation

The operation of Gresham's law is evident, for example, if between two kinds of money legally parity is fixed (double currency) or more pronounced, although paper money circulates in addition to full-fledged metal money with forced currency.

While the " worse ", the material value fro cheaper money is used as currency for payment purposes, the higher estimated cash flows frequently from abroad or is issued in the country after taking out of circulation not return for payment purposes and thus hoarded as a store of value. In many cases, that is therefore considered " good money " as long as possible, because the future appreciation of the higher valued money is expected and then corresponding profits are realized. It disappears from the circulation of money. In times of crisis, however, these hoarded money characters can at least partially re-emerge for payment or as " bargaining chips " to be then usually hoarded again by other speculators.

However, this mechanism of Gresham's Law can only enter into force if the debtor or buyer can ever make a choice decision, with what kind of money (eg, gold or paper money, Kurantmünzen or coins ) he settle an open account or a purchased product can pay for.

Furthermore, it is observed if the goods are cheaper than domestically abroad, where foreign money is accepted that then the domestic, private, possible 'cheaper' money as long as there drains, until an equilibrium price increases by foreign customs or surveys, etc., or domestic price reductions has been established.

Even today, in the era of pure fiat money currencies, Gresham's law works even when, for example, inflation, the nominal value of the smallest, base circulation coins falls below their actual material value where the original total cost of the coin here are meaningless. This base circulation coins are then removed from the circulation by the private sector and possibly even used as raw materials for products - if the State did not already feeding time and verruft or issued coins with smaller dimensions and cheaper materials. Some countries, eg the United States, therefore, to other banned the use of coins as payment purposes under penalty of law.

History

The name of Gresham's Law goes back to Sir Thomas Gresham (1519-1579), who was adviser to the British monarch and founder of the London Stock Exchange in the Elizabethan era. Even at the time of Gresham's birth formulated Nicolaus Copernicus, in his capacity as Prussian canon, in his memoranda on the issue coinage. Regardless of the law has been around 150 years later formulated by Japanese Confucian scholar Arai Hakuseki.

Even Aristophanes, however, does in his comedy The Frogs the choir leaders recognized the use preferably made ​​of poor foreign coin against the local coin despite their better validity criticize and compare with the preference of the villains from the stranger in front of well-educated local citizens. Nevertheless, this remains an observation of a conspicuous behavior, which is denounced as foolish.

Scope of the Act

Gresham continued his studies at a time, were forced into the creditor ( seller) by law to accept bad money to the statutory rate or price. However, if allowed to decide all economic operators which they wish to be paid good money will quickly displace the poor, since none voluntarily accepts the bad money at the rate of good money.

In a saturated market decide not the seller, which he accepts, but the customer what they are buying. The seller can either accept the bad money of the customer and thus make sales, or he waived and the customer chooses another supplier who would rather accept the bad money than to make no sales.

There are also cases in which Gresham's law without state coercion was effective. So led the successful Dutch Baltic trade to that of the originally derived from the Spanish Netherlands Albertus Taler as a trade coin was very popular in the Baltic region in the 17th century. This popularity was reflected in the fact that seller for a specified in ( imperial ) thalers price assumptions and the same amount of Albertus thalers. However, a fully satisfying embossed Reichstaler contains 25.98 g of fine silver, one Albertus Taler only 24.65 g Therefore, there was more and handled more transactions in Albertus thalers.