A British Economist Henry Dunning Macleod termed an interesting law namely Gresham’s law in 1858. (named after an English financier and advisor Sir Thomas Gresham) The law states that bad money drives out good money. It implies that when two forms of money are in circulation, and one is seen as more valuable (good money), people try to hoard it and use the less valuable money, that is the bad money for transactions. The law applies most clearly when the two forms of money that are being compared should have the same face value but different intrinsic value.
Henry Dunning Macleod
Sir Thomas Gresham
After learning about the law, my mind instantly started searching for a real-world application of the law. In India, in the current context, both Rs.10 coins and Rs.10 notes are in circulation. Is this law applicable here? Do people tend to hoard either of two(the coin or note) because they value it more? Not really. There is mild application of the law which is based more on public perception and convenience. In some regions in India, (Tamil Nadu, Andhra Pradesh, and Chhattisgarh) shopkeepers used to refuse Rs.10 coins due to the rumors that these coins were fake. However, this is not the perfect application of the law as there is no difference in the intrinsic value of the note and the coin.
The law seems to apply when people tend to use older or worn-out coins or notes for everyday transactions and hoard the newer and shinier coins. Old coins, that is bad money, stay in circulation as people prefer to use them while they hoard the newer coins in their wallets or piggy banks. Another example is the use of small denomination coins vs. large denomination coins. 50 paise coin is still a legal tender in India but has disappeared from circulation. The 50 paise coin is seen as bad money because it has low purchasing power and is inconvenient to use. In contrast, Rs.1 and Rs.2 coins are seen as good money.
And now here’s an example from ancient times. In ancient times in India, silver coins were in wide circulation, and gold coins were considered more valuable and people hoarded them because of high intrinsic value. As a result, gold disappeared from circulation. This can be considered the perfect example of the application of Gresham’s law.
Well, if you thought that the law applies only to the forms of money, then here are some other examples. On social media, misinformation, sensational headlines, or inappropriate videos gain more attention than high-quality educational videos. The law can apply in any situation where two types of goods or services are treated the same but one is lower intrinsic value or lower quality. Do you know any more examples? Share them in the comments!!
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