Bad money drives out good, and people have noticed for 2,400 years.
If two coins must legally be accepted at the same value, but one contains more silver, people spend the cheap one and keep the good one. Soon only the bad coins circulate. It is called Gresham's law, but Copernicus described it in 1519, and Aristophanes joked about it in ancient Athens.
Gresham's law says that when debased money and full-value money must be accepted at the same face value, the debased money ends up in circulation and the good money disappears into savings, melting pots or foreign trade. The logic is simple. When you pay, you hand over your worst coin, and the shopkeeper gives change in the worst coin they have.
Sir Thomas Gresham, the Tudor financier, explained the problem to Elizabeth I on her accession in 1558. Her father Henry VIII had replaced much of the silver in English coins with base metal to raise money without raising taxes, and the good old coins had vanished. But the name was only attached in the 1850s by the economist Henry Dunning Macleod. Nicole Oresme wrote about the effect around 1350, Copernicus set it out in a 1519 treatise, and Aristophanes compared bad politicians to bad coins in The Frogs, usually dated to 405 BC.
The effect keeps recurring. When Isaac Newton, as Master of the Mint, fixed the gold guinea at 21 silver shillings in 1717, gold was overvalued at home, silver flowed abroad, and Britain drifted onto a gold standard. When US half-dollars went from 90 per cent to 40 per cent silver in 1965, the older coins quickly vanished into hoards.
There is an important condition: the law needs legal tender rules forcing people to accept both coins at the same price. Without that, it can run in reverse, sometimes called Thiers' law. In hyperinflations, people stop accepting the failing currency and turn to anything that holds value. The same idea has been borrowed elsewhere, most famously in the 'market for lemons', where hidden bad used cars drive good ones out of the market.
Source: Wikipedia — Gresham's law · Text summarised from Wikipedia (CC BY-SA 4.0)
