Definition
Gresham's law is the economic observation that "bad money drives out good." When two forms of money are required by law to be accepted at the same value, people tend to spend the one they consider less valuable and hold onto the one they consider more valuable. Over time the "good" money disappears from everyday circulation, leaving the "bad" money to dominate transactions. The principle is named after Sir Thomas Gresham, a 16th-century English financier, though the pattern had been noted earlier.
The classic mechanism
The law historically applied to coins of differing metal content. If a government decreed that an old, high-silver coin and a newly debased, low-silver coin must both be accepted at the same face value, rational holders spent the debased coins and saved or melted the full-silver ones. The crucial precondition is a legal-tender rule or fixed exchange rate forcing the two monies to circulate at par when the market is free to price them differently, the effect weakens or reverses.
Relevance to modern and digital money
The same logic is discussed in the context of any two currencies held at a mandated parity, and sometimes in Bitcoin debates: if people view a fixed-supply asset as superior "good" money, they may prefer to save it and transact with the more abundant "bad" money, which can slow the asset's use as a medium of exchange. This is an analytical observation, not a prediction. Some economists note the reverse ("good money drives out bad") can occur when currencies are freely chosen rather than imposed at par.
Gresham's law pairs naturally with the concept of monetary sound money and with time preference, since the decision to hoard or spend reflects how holders value present versus future purchasing power.
In Simple Terms
Gresham’s law is the economic observation that “bad money drives out good.” When two forms of money are required by law to be accepted at…