On Gresham’s lawby@knut.svanholm
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On Gresham’s law

by Knut Svanholm3mMarch 28th, 2018
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<span>G</span>resham’s law states that bad money drives out good money. It describes a phenomenon seen as well in school yards as in developing countries. In any market, people will hoard the good stuff and spend the bad. Discounted products in a store is an example of how this works. If a store has too much of a certain good it will lower the price of that good to free up space in its warehouse. Many goods are popular for very limited amounts of time. The fidget spinner for instance, has suffered from something very much like hyperinflation and therefore merchants try to rid themselves of their fidget spinners faster and faster. Currencies behave in a very similar manner. Take the recent case of the biggest denominations of the Indian Rupee for instance. The two largest Rupee banknotes, 500 and 1000, were demonetized by the Indian government on the 8th of November last year. The official excuse they had for doing so was to fight corruption and money laundry. Curiously enough though, the bills didn’t stop circulating. Instead circulation increased while the value of the bill started to decline, as predicted by Gresham’s law.

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