Salvaging Gresham's Law: The Good, the Bad, and the Illegal

George Selgin

103 citations0/0 files storedJournal of money credit and banking

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Economic theories and models Monetary Policy and Economic Impact Economic Theory and Institutions

Abstract

Contrary to the claims of Arthur Rolnick and Warren Weber, Gresham's Law is not a 'fallacy.' Nor does it rest on the unrealistic assumption of an operational fixed (disequilibrium) exchange rate between two economically distinct monies. Here I interpret Gresham's Law as a result of coercive legal tender laws aimed at discouraging agents from discriminating among alternative monies. Such laws can systematically drive 'good' money out of circulation by placing buyers and sellers in a Prisoner's Dilemma in which the use of 'bad' money represents a unique noncooperative equilibrium. I offer some historical examples, which are not readily explainable using Rolnick and Weber's proposed alternative to Gresham's Law. Copyright 1996 by Ohio State University Press.

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