Does ‘bad’ money drive out ‘good’ money, as Sir Thomas Gresham claimed back in the mid-C16?

This turns out to be Complicated.

See Wikipedia on the subject, as well as this lively and elegant analysis.

The issue arose because once upon a time the core standard of value was gold. Governments might cheat by circulating coins with less (and less) gold in them. So if you had coins it made sense to try to use not your best gold coins to buy things but rather the ‘debased’ coins, to get rid of them.

Hence a tendency for better gold coins to be hoarded, and bad ones to dominate the market-place: ‘Bad’ money drives out ‘good’ money.

Of course it all depends on what part of the sequence you are considering. Our good friend Timescale reappears.

Keeping your best money at home might be seen as the good money driving the bad money out of the house. In this sense the good money is lying low, waiting for the bad money to disappear as (eventually) the market system will break down without Honest Money.

Back in real life, in my experience people want to use real money. So when currencies deteriorate, people use better alternatives. Good money starts to drive out bad money.

As in Mugabe’s Zimbabwe:

Prices went the other way, tripling on Thursday alone … "You’d think that these numbers would cripple us, that we might as well stay in bed. But people find other ways and the way is to sell in US dollars."

Mugabe’s most dramatic recent concession to reality was the recognition of the US dollar and South African rand as the real national currencies of Zimbabwe these days.

The government spent months trying to suppress trading in foreign currency but underground supermarkets sprang up in garages and warehouses stocked with imports from South Africa.

Restaurants and shops took foreign money under the counter. With rapid devaluation and the shortage of Zimbabwe dollar notes, the middle-class began to pay their maids and gardeners in hard currency.

Eventually, the government faced the reality that there was only anything in the shops at all beyond a few vegetables and eggs because of trading in foreign currency – in part driven by the 3 million Zimbabweans who have fled the country, mostly for South Africa, sending money home. It legalised the use of US dollars and rand in September but the effect of that has been to make it impossible to buy almost anything without foreign currency… 

Of course the incompetence required to create this situation has to be hidden:

Cash has been in desperately short supply because the government cannot print fast enough to keep up with hyperinflation. Officially inflation stands at 231m percent, but that was in July. Since then the central bank has regarded economic statistics as a state secret.

It al comes down to Honest Money. Which requires Honest Government.

Could Zimbabwe happen here in the UK? Surely not!

Yet Guido is worried about a small proposed change in the law here:

The 1844 Banking Bill ensured transparency in the operations of the Bank of England. It has been good enough for over 164 years…