Changes

Imagine if people used both gold, which is a strong form of money, and paper dollars, which is weaker than gold because it loses value in inflation.  Which would they use when buying groceries or other goods?  People would prefer to pay with the weaker dollars and save the gold at home.  Everyone would prefer to use the weaker money in transactions.  A visitor would see mostly dollars in circulation, and very little gold.  Hence the "bad money drives out the good."  A cheap form of money tends to drive the better form of money out of circulation in the market.

Imagine if people used both gold, which is a strong form of money, and paper dollars, which is weaker than gold because it loses value in inflation.  Which would they use when buying groceries or other goods?  People would prefer to pay with the weaker dollars and save the gold at home.  Everyone would prefer to use the weaker money in transactions.  A visitor would see mostly dollars in circulation, and very little gold.  Hence the "bad money drives out the good."  A cheap form of money tends to drive the better form of money out of circulation in the market.

In 19th century America, both silver and gold were accepted currency (as in 19th century America).  But silver was a weaker form of money, and thus people preferred to buy things in silver rather than gold.  People wanted to save the gold for themselves and get rid of the silver.  The result is that the cheaper currency (silver) would be used more often in market transactions, and the gold would be driven out of the market.  "Bad money drives out good."

In 19th century America, both silver and gold were accepted currency (as in 19th century America).  But silver was a weaker form of money, and thus people preferred to buy things in silver rather than gold.  People wanted to save the gold for themselves and get rid of the silver.  The result is that the cheaper currency (silver) would be used more often to pay debts and buy things, and the gold would be driven out of the market.  "Bad money drives out good."

Gresham's Law is named after Sir Thomas Gresham, who was the Master of the Mint under Queen Elizabeth I in the 1500s.  

Gresham's Law is named after Sir Thomas Gresham, who was the Master of the Mint under Queen Elizabeth I in the 1500s.  

===A Brief History of U.S. Money===

===A Brief History of U.S. Money===

On July 6, 1785 -- two years before the Constitutional Convention drafted the U.S. Constitution -- our young nation unanimously selected the dollar to be the monetary unit.  This was the first time in history that a country selected a decimal system (rather than a fractional system) for its money.  The name "dollar" came from the name of a Spanish silver coin called the dollar, which was used during the Revolutionary War and later as a basis for the "greenbacks" (first "green" dollar bills) that were first issued during the Civil War, to pay for the Union side's expenses.

On July 6, 1785 -- two years before the Constitutional Convention drafted the U.S. Constitution -- our young nation unanimously selected the dollar to be the monetary unit.  This was the first time in history that a country selected a decimal system (rather than a fractional system) for its money.  The name "dollar" came from the name of a Spanish silver coin called the dollar, which was used during the Revolutionary War and later as a basis for the "greenbacks" (the first "green" dollar bills) that were first issued during the Civil War, to pay for the Union side's expenses.

From 1785 to 1974 -- nearly 200 years -- our dollar was backed by gold or silver or both, and some politicians (such as Congressman and former presidential candidate Ron Paul) urge that we return to the "gold standard" for the dollar in order to guard against inflation.  Gold is in limited supply in the world, and inflation can be controlled by tying the dollar to something in limited supply.  That way more and more dollars could not be printed by the government, which decreases their value.

From 1785 to 1974 -- nearly 200 years -- our dollar was backed by gold or silver or both, and some politicians (such as Congressman and former presidential candidate Ron Paul) urge that we return to the "gold standard" for the dollar in order to guard against inflation.  Gold is in limited supply in the world, and inflation can be controlled by tying the dollar to something in limited supply.  That way more and more dollars could not be printed by the government, which decreases their value.

We used a system of "bimetallism" from 1792 to 1873, by which the dollar was "backed" (could be traded in for) gold or silver.  A ratio of 15:1 was used; someone received 15 times as much silver as gold for a dollar.  In 1834 this was adjusted to 16:1 as more silver was discovered.  Led by Republicans after the Civil War, Congress gradually phased out the use of silver because it was considered to be a cheap, inflationary form of money, and in 1900 an entirely gold standard was adopted.  Recall from history how William Jennings Bryan made his famous "Cross of Gold" speech (in favor of retaining silver as a standard and thereby avoid being "crucified" on gold) in obtaining the Democratic nomination for president in 1896.  Bryan lost.

We used a system of "bimetallism" from 1792 to 1873, by which the dollar was "backed" (could be traded in for) gold or silver.  A ratio of 15:1 was first used; someone received 15 times as much silver as gold for a dollar.  In 1834 this was adjusted to 16:1 as more silver was discovered.  Led by Republicans after the Civil War, Congress gradually phased out the use of silver because it was considered to be a cheap, inflationary form of money, and in 1900 an entirely gold standard was adopted.  Recall from history how William Jennings Bryan made his famous "Cross of Gold" speech (in favor of retaining silver as a standard and thereby avoid being "crucified" on gold) in obtaining the Democratic nomination for president in 1896.  Bryan then lost to Republican William McKinley in the general election.

But gold eventually lost out also, and was removed as the standard in 1974.  Now the U.S. dollar is backed by nothing but a belief that it will continue to have value.  The dollar is sometimes called "fiat money" because it cannot be traded in for anything like gold.  One might say the dollar is backed by the American economy, or the U.S. Constitution and our political system.  Most of the U.S. dollars in the world today are actually being held and used in foreign countries.

But gold eventually lost out also, and was removed as the standard in 1974.  Now the U.S. dollar is backed by nothing but a belief that it will continue to have value.  The dollar is sometimes called "fiat money" because it cannot be traded in for anything like gold.  One might say the dollar is backed by the American economy, or the U.S. Constitution and our political system.  Most of the U.S. dollars in the world today are actually being held and used in foreign countries.

As of July 31, 2000, the total amount of dollars in the world was worth $539,890,223,079 (that's over $539 ''trillion''), of which the largest denomination (type of bill) was the $100 bill: $364,724,397,100 worth.

As of July 31, 2000, the total amount of dollars in the world was worth $539,890,223,079 (that's over $539 ''trillion''), of which the largest denomination (type of bill) was the $100 bill: $364,724,397,100 worth.

===Applying Gresham's Law beyond Economics===

===Applying Gresham's Law beyond Economics===