When Bad Money Drives Out Good
In 1965 the U.S. Mint quietly switched dimes from silver to copper-nickel. Within a year, the silver ones had vanished from circulation.
Sir Thomas Gresham was a 16th-century English financier who advised Elizabeth I on currency reform, and the law that bears his name is one of the oldest counterintuitive ideas in economics. The short version: when two coins of equal face value but unequal metal value circulate together, people spend the cheaper one and hoard the dearer one. The good money disappears from tills.
The quiet condition that makes the law work is legal tender. If a shopkeeper must accept a worn copper-nickel quarter at the same value as a brand-new silver one, no rational person hands over the silver. They pay with the copper and stash the silver in a sock drawer or melt it down.
The United States lived through a textbook case in 1965. The Coinage Act of that year removed silver from dimes and quarters and dropped the silver content of the half-dollar from 90% to 40%. Pre-1965 silver coins were instantly worth more as metal than as money. Coin Star jars filled up. Within a few years the old coins were gone from registers and into collectors' tubes.
The principle generalizes well past coins. Counterfeit banknotes drive real ones into safes. Inflated paper currencies push gold and dollars under mattresses in countries with fixed exchange rates. Even loyalty points obey it: hoard the high-value miles, burn the low-value ones first.
Gresham was describing human nature dressed up as monetary policy. Given a choice, no one spends what they would rather keep.
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