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I have heard the saying, "Bad money drives good money out of circulation," (Gresham's Law) many times.

I'm wondering if it's true, what it really means. What's good money? What's bad money?

And if this is true, what evidence do we have and do we know why this happens?

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Gresham's law has to do with commodity money. When several types of commodity money are available (e.g., both gold and silver coins), the one with the lowest quality will drive the rest out of circulation. The underlying idea is that everyone will try to hoard the "good money" while using the "bad money" for payments.

You have a full description of this issue in wikipedia.

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