GRESHAM'S LAW

observation in economics that bad money drives out good. If two coins have the same nominal value but are made from metals of unequal value, the cheaper will tend to drive the other out of circulation. Sir Thomas Gresham, financial agent of Queen Elizabeth I, was not the first to recognize this monetary principle, but his elucidation of it in 1558 prompted the economist H.D. Macleod to suggest the term Gresham's law in the 19th century. Money functions in ways other than as a domestic medium of exchange; it also may be used for foreign exchange, as a commodity, or as a store of value. If a particular kind of money is worth more in one of these other functions, it will be used to buy foreign exchange or will be hoarded rather than used for domestic transactions. For example, during the period from 1792 to 1834 the United States maintained an exchange ratio between silver and gold of 15:1, while the ratios in European countries ranged from 15.5:1 to 16.06:1. This made it profitable for owners of gold to sell their gold in the European market and take their silver to the United States mint. The effect was that gold was withdrawn from domestic circulation; the inferior money had driven it out.