What is Gresham’s Law and why does it matter?

Alderman Michael Mainelli, Chartered FCSI(Hon), Sheriff of the City of London and Emeritus Professor of Commerce at Gresham College, presents an overview of the origins and developments of Gresham's Law


Professor Michael Mainelli has made a special study over many years of the life and work of Sir Thomas Gresham, founder of the eponymous college and subject of a vibrant new biography by Tudor historian John Guy.

In this masterly overview – adapted from his article at mainelli.org – of the origins and development of Gresham’s Law, he paints a vivid picture of the intellectual spirit and verve that has guided economics, the supposedly ‘dismal’ science, over the centuries. 

Professor Mainelli has long been at the forefront of stimulating constructive debate around the City, not least in his role at Gresham College, and brings fresh and important present-day insights to conundrums of the past.

Introduction by George Littlejohn MCSI, senior adviser to the CISI



Michael Mainelli, Chartered FCSI(Hon)
mainelli_350 Michael is executive chair of Z/Yen Group. Z/Yen is the renowned creator of the Global Financial Centres Index among other things.

Michael’s book, The price of fish: a new approach to wicked economics and better decisions, written with Ian Harris, won the 2012 Independent Publisher Book Awards Finance, Investment & Economics Gold Prize.
Colloquially expressed as ‘bad money drives out good’, Gresham’s Law was attributed to Sir Thomas Gresham in 1858 by Scottish economist Henry Dunning Macleod. In Tudor times, governments sometimes issued silver coins adulterated with lead, so that people traded in these coins while hoarding the more valuable pure silver coins, saving them up for better times, or exporting them to get their full value. The Nobel economist Robert Mundell rephrased Gresham’s Law more accurately as “cheap money drives out dear money only if they must be exchanged for the same price”.

Gresham’s Law applies in any situation where two or more goods of varying quality are being sold for the same price. People are shrewd. They try to get the better quality items first. So why the confusion?

Some points on Gresham’s law: it a) goes back to Aristophanes; b) is incorrectly expressed by most people; and c) is falsely attributed to Sir Thomas. Encyclopaedia Britannica helps a bit.

Gresham’s Law
Observation in economics that ‘bad money drives out good’. More exactly, if coins containing metal of different value have the same value as legal tender, the coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and thus tend to disappear from circulation. Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognise this monetary principle, but his elucidation of it in 1558 prompted the economist HD Macleod to suggest the term Gresham’s Law in the 19th century.

The elegiac poet Theognis, writing in the late 6th and early 5th century BC, wrote a few lines suggesting Gresham's Law: "Nor will anyone take in exchange worse when better is to be had." Aristophanes expresses the Law in his 405 BC play The Frogs. But these express more that ‘good money drives out bad’.

From Robert Mundell’s ‘Uses and abuses of Gresham’s Law in the history of money’, Columbia University, August 1998: “Cheap money drives out dear, if they exchange for the same price”, rather than the misleading and overly terse, ‘bad money drives out good’. Put more generally, ‘a cheap measure drives out a valuable measure, if they exchange for the same price’.

‘Good money drives out bad?’ – excerpt from section 3 of Mundell’s paper
The usual expression of the law, ‘bad money drives out good’ is a mistake. Schumpeter refers to this common definition as “not quite correct”. But as the statement stands, it is not just “not quite correct”; it is quite false. The opposite is true!

Standing by itself, the general statement, ‘good money drives out bad’, is the more correct empirical proposition. Historically, it has been good, strong currencies that have driven out bad, weak currencies. Over the span of several millennia, strong currencies have dominated and driven out weak in international competition. The Persian daric, the Greek tetradrachma, the Macedonian stater, and the Roman denarius did not become dominant currencies of the ancient world because they were ‘bad’ or ‘weak’. The florins, ducats and sequins of the Italian city-states did not become the ‘dollars of the Middle Ages’ because they were bad coins; they were among the best coins ever made. The pound sterling in the 19th century and the dollar in the 20th century did not become the dominant currencies of their time because they were weak. Consistency, stability and high quality have been the attributes of great currencies that have won the competition for use as international money.

If Gresham’s Law could be rendered coherently as ‘bad money drives out good’ it would have no claim to our attention as a serious proposition of economics. On the contrary, it is a completely false generalization, and an invalid rendering of Gresham’s Law.

If only Macleod had said “good and bad coin cannot be forced to circulate together, but the bad coin will drive out the good”Perhaps the closest Gresham himself comes to expressing his eponymous law is in a letter to Queen Elizabeth around 1560:

Ytt may pleasse your majesty to understande, thatt the firste occasion off the fall of the exchainge did growe by the Kinges majesty, your latte ffather, in abasinge his quoyne ffrome vi ounces fine too iii ounces fine. Wheruppon the exchainge fell ffrome xxvi*. viiirf. to xiii*. ivrf. which was the occasion thatt all your ffine goold was convayd ought of this your realme.

In an 1857 essay, Henry Dunning Macleod touches on Sir Thomas:

At last, Sir Thomas Gresham explained to Queen Elizabeth that allowing base and degraded coin to circulate along with good coin caused it to disappear; that bad coin and good coin cannot circulate together; but that the bad coin invariably and necessarily drives out good coin from circulation, and alone remains current.

Macleod starts the statement problem when he tries in 1860 to express things more completely in his Theory and practice of banking, p.216, where he appears to contradict himself a bit:

These considerations lead us to a fundamental and universal law in Political Economy, which has been found to be true in all countries and ages – that bad money drives out good money from circulation; or, as it is expressed in an anonymous pamphlet A reply to the defence of the bank, setting forth the unreasonableness of their slow payments, London, 1696, “When two sorts of coin are current in the same nation of like value by denomination, but not intrinsically, that which has the least value will be current, and the other as much as possible will be hoarded,”or exported, we may add. The fact of the disappearance of good coin in the presence of bad, was noticed by Aristophanes; and was long the puzzle of financiers and statesmen, who continued to issue good coin from the Mint, and were greatly perplexed by its immediate disappearance, till Sir Thomas Gresham explained the cause, whence we have called it Gresham’s Law of the Currency.

Macleod is clearly aware that Aristophanes mentions the law in The Frogs (405 BC):

This law is of such fundamental importance in Political Economy, viz., That good and bad coin cannot circulate together, but the bad coin will drive out the good, that it may be interesting to quote the passage which contains the earliest notice, that we are aware of, of the phenomenon.” Aristophanes, Frogs, 765, says: “The State has very often appeared to us to be placed in the same position towards the good and noble citizens as it is with regard to the old currency and the new gold; for we make no use at all, either at home or abroad, of those which are not adulterated, but the most beautiful of all money, as it would seem, which are alone well coined and ring properly, but of this base copper, struck only yesterday, and recently of a most villainous stamp. And such of the citizens as we know to be well-born and prudent and honorable gentlemen, and educated in the palaestra, and chorus, and liberal knowledge, we insult. But the impudent and foreigners, and the base born, and the rascals, and the sons of rascals, and those most recently come, we employ.” This law, thus first noticed by Aristophanes, has been found to be true in every age and country. It is also from the same principle that a paper currency is invariably found to expel a metallic currency of the same denomination from circulation. And to show the generality of the principle, it was found in America that when a depreciated paper currency had driven coin out of circulation, and a still more depreciated paper currency was issued, the more depreciated drove out the less appreciated from circulation.

Gresham would never have said baldly, “bad money drives out good”. Macleod provides a number of explanations in close proximity, any of which could be his ‘Gresham’s Law’ – “bad money drives out good”, “when two sorts of coin are current in the same nation of like value by denomination, but not intrinsically, that which has the least value will be current, and the other as much as possible will be hoarded”, “disappearance of good coin in the presence of bad”, “‘good and bad coin cannot circulate together, but the bad coin will drive out the good”. The last, rather ambiguous one, seems to be the explanation driving the subsequent century and a half of schoolyard trivia. If only Macleod had said “good and bad coin cannot be forced to circulate together, but the bad coin will drive out the good”, we would have had a useful statement for everyday use.

As Mundell concludes: “Schumpeter’s comment points up a paradox: the law is trivially easy to understand, but then why does everybody get it wrong?”

So this year, Z/Yen has struck a coin that poke funs at Gresham’s Law reversibility by having one phrase on the obverse and the other on the reverse. Perhaps the 500th anniversary of Sir Thomas Gresham’s birth will help return attention to this 2,500 year old Law, and reverse 160 years of recent confusion brought on by Macleod. Hopefully over time “good law drives out bad” as “good money drives out bad”.

This article was originally published in the February 2020 print edition of Review of Financial Markets, the academic section of The Review.

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Published: 26 Feb 2020
  • Wealth Management
  • Sir Thomas Gresham
  • Robert Mundell
  • Henry Dunning Macleod
  • Gresham's Law

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