It states that “bad money drives out good money”. People tend to hold new money as they spend the old one. They consider the new money to have some form of utilities by having it. This because the old money is either mutilated or debased to an extent that individuals start lacking confidence in the old money. Hence central monetary authority is expected to ensure that the dirty money is removed from circulation.
Gresham law is applicable majorly in the cross border trade where old coins and notes tend to be scarcely used for facilitating exchange. The old notes seize to be acceptable for international payment. A major reason why people then hold new coins is to use the new money to pay for foreign indebtedness. This then makes new money to disappear from the domestic markets leaving the old money.
Wilfykil answered the question on March 8, 2019 at 08:02