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Gresham's Law or Gresham's Fallacy

Staff Report 88 | Published August 1, 1983

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Arthur J. Rolnick Senior Vice President and Director of Research, 1985-2010
Warren E. Weber Retired Economist
Gresham's Law or Gresham's Fallacy


The claim that bad money drives out good is one of the oldest and most cited in economics. Economists refer to this claim as Gresham’s law. Yet despite its seemingly universal acceptance, this claim does not warrant its status as a law. We find it has no convincing explanations and many overlooked exceptions. We propose an alternative hypothesis based on the costs of using a medium of exchange at a nonpar price: small-denomination currency undervalued at the mint tends to disappear from circulation while large-denomination currency usually circulates at premium. Examining a variety of historical episodes when market and legal prices were different, we find our “law” can explain history much better than Gresham’s.

Published in: _Journal of Political Economy_ (Vol. 94, No. 1, February 1986, pp. 185-199) Published in: _Quarterly Review_ (Vol. 10, No. 1, Winter 1986, pp. 17-24)