Comment by eru | Hacker News Reader

Comment by eru | Hacker News Reader

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That blog post is misquoting a version of Gresham's law that's not actually true.

For 'bad money' to drive out 'good money', you need some force that compels sellers to accepts 'bad money' the same way they accept 'good money'. Because otherwise sellers will natural only accept the bad money with a discount or even refuse outright.

You can see that in action in many black markets around the world, where people use American dollars because their local currency is 'bad'.

Wikipedia has a lot of detail and background. https://en.wikipedia.org/wiki/Gresham%27s_law

> Those examples show that in the absence of effective legal tender laws, Gresham's Law works in reverse. If given the choice of what money to accept, people will transact with money they believe to be of highest long-term value. However, if not given the choice and required to accept all money, good and bad, they will tend to keep the money of greater perceived value in their possession and to pass on the bad money to someone else.

Have a look at https://web.archive.org/web/20130317073119/http://eh.net/enc... as well.

The full and proper qualification, as concerns money, is given in the first 'graph of the essay:

"Whenever coins containing precious metals have been used along with base metal coins of the same denomination, both legally accepted as tender, the bad coins have driven the good coins out of circulation."

(Emphasis added.)

The key is that within a given monetary system, "bad" and "good" coin have the same social or statutory (whichever effectively governs) exchange value.

This is not the case in a black-market exchange where U.S. dollars displace local currency, just as it was not the case in the early post-revolutionary United States where commodity currencies (often pelts or grain), or foreign denominations (Spanish "pieces. of eight" reals or English pounds) displaced the much-derided "continental dollar".

The black-market currency does not face the same nominal exchange rate as the inferior currency, but instead has an independent (and almost always far more stable) exchange value. So long as the black-market currency is generally exchangeable for goods and services generally required, and the official currency can be readily obtained for transactions in which. it is mandated -- say, payment of national taxes, you'll see a preference for the black-market currency.

This balance point may be further shifted by mandates that, say, retail, payroll, and banking transactions be in the official currency. In most regions with a substantial black-market role, institutional trust and regulatory and statutory compliance are low enough, and often the true underlying dysfunction, that their role, and hence effective monetary compliance capacity, are effectvely nil.

For what it's worth, I've been exploring Gresham's Law and related dynamics for some time:

https://old.reddit.com/r/dredmorbius/search?q=gresham%27s+la...

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