Gresham's law or Gresham's fallacy?

Arthur J. Rolnick and Warren Weber

No 88, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: 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.

Date: 1983
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Published in Quarterly Review (Vol.10, n.1, Winter 1986, pp.17-24)

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Journal Article: Gresham's law or Gresham's fallacy? (1986)
Journal Article: Gresham's Law or Gresham's Fallacy? (1986)
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