[PDF Notes] What are the Merits of the Gresham’s Law?

Gresham’s law will operate if the following necessary conditions are satisified. In the absence of these conditions the law will fail to apply.

1. Usefulness of Good Money:

An important condition for Gresham’s law is that the intrinsically more valuable money (i. e., good money) must also be more valuable in other uses than it is as money in circulation.

The failure of this condition to apply explains why the coin currency today remains in circulation as fairly as paper currency despite its higher intrinsic value.

2. Fixed Parity Ratio:

The applicability of the law requires that the intrinsically more valuable money must be relatively fixed by law in its parity with money. The law will not hold where one money becomes intrinsically more valuable than another money (at the old parity) if the parity changes.

3. Sufficient Money Supply:

The law will operate only if both good money and bad money are in circulation and the total money supply is more than the actual monetary requirements of the economy.

4. Sufficient Supply of Bad Money:

The applicability of the law requires that there should be sufficient bad money in circulation to meet the transactions requirement of the people. If there is scarcity of bad money, both good and bad money will remain in circulation and the law will not operate.

5. Contents of Pure Metal:

The law will not operate if the contents of pure metal in coins are less than that in the old ones.

6. Acceptability of Bad Money:

The law will operate if people are prepared to accept bad money in transactions.

7. Distinction between Good Money and Bad Money:

The law assumes that people can distinguish between bad money and good money.

8. Development of Banking Habit:

The law applies in the absence of banking habits. Development of banking habits among the people tends to discourage hoarding and thus restricts the operation of Gresham’s law.

9. Convertibility:

The law also does not operate if the country is on inconvertible paper standard.

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