Construct · 1 fields · 3 citations
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The economist Henry Dunning Macleod, in The Elements of Political Economy (1858), attached the name of the Tudor financier Sir Thomas Gresham to a monetary principle usually stated as "bad money drives out good": when two coins are required by law to trade at the same face value but differ in the worth of the metal they contain, people spend the debased or overvalued coin and hold back, melt, or export the full-weight one, so the poorer money stays in circulation and the better money disappears. The observation is older than the name, appearing in the work of Nicolaus Copernicus and Nicole Oresme and, in comic form, as far back as Aristophanes, but Macleod's label is the one that endured. Arthur Rolnick and Warren Weber (1986) sharpened the claim by showing that it holds only under specific conditions, chiefly a legally fixed exchange rate between the two monies together with costs that keep people from freely trading them at their true values, and that where those conditions fail the good money can circulate alongside the bad. The construct is distinctive as one of the earliest formal statements in monetary economics of how a legal price control, here an official exchange rate between two forms of money, changes which of them people are willing to part with. In modern usage the same phrase is sometimes extended by analogy to non-monetary settings such as markets where quality is hidden, a link recorded on the adverse selection page and not treated as a separate construct here.[1][2][3]
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