I think this could only happen if the dollars had a fiat exchange-rate with the competing currency, and said so in this reddit.com thread, but dryice's "what would you do with your wallet" response there gave me pause -- and you can see that my later response is merely suggestive.
So, please help me out. Is dryice right after all? If he is wrong, what is a cleaner, more direct answer to his error? And what should I read to have a better understanding of currency competition of all kinds?
I think he's right. Bad money might get ousted by good money in a free market, but we don't have a free market. We have a government controlled monopoly on money where you're obliged to pay your taxes in whatever currency your government issues. In the US (although certainly not everywhere) you've even charged capital gains taxes on any increase in value that you might have achieved by holding your savings in another currency - although that tax generally won't be 100% so it still makes good sense to hold other currencies if you think your own currency is going down hill, even despite the capital gains tax (and many countries don't actually have capital gains taxes).
Personally I'd spend the crapy money before I spent the good money and I think as a general rule this would hold. You can do one of three things with your money:
What percentage you spend, invest and save will depend on your time preference but generally the money you hold onto you'd want to keep it's value (or increase in value) until such a time as you did want to spend it. So if you thought that one of the coins you were holding was going to loose value quicker than the other one, you'd get rid of that one first. And as a consequence, you could expect vendors would more readily accept good money than bad (as has been witnessed in many countries in South America where people choose to use USD rather than their own currencies - often putting a price penalty on the goods for anyone who wanted to pay in their own currencies).
jimmy:Bad money might get ousted by good money in a free market,
OK, but how? You and I both agree on:
Personally I'd spend the crapy money before I spent the good money
vendors would more readily accept good money than bad
Vendor 'readiness' must be expressed through vendor exchange-rates. Without a fiat exchange rate, people won't accept the dollars as 'change' for pounds, and the market if anything tends to shift away from the bad currency: people with pound-wages will continue to use that as a solid currency, while throwing away any dollars they get; vendors will continue to discriminate against dollars; people with dollar-wages will throw away the dollars for goods or -- to maintain their cash balance -- buy pounds. How does this make for any kind of flight away from the strong currency? Gresham's Law concerned monies pegged to each other (indeed, the coins were both state currency, with the same face value), which had various metal values, such that you could melt the strong coin and make a bad-coin profit.
I think you've answered your own question here but let's clarify a little:
1. When vendors are allowed to refuse or discount bad money, then the bad money will be driven out of the market as people increasingly refuse to accept the bad money of questionable value. In this case, good drives out bad, just like with any other product on the free market.
2. When vendors are prevented from refusing or discounting bad money, then everyone hoards the good money and spends the less valuable bad money while they can. Bad drives out good. A secondary "black" market usually establishes itself where the good money can be traded at a premium relative to the bad money.
Gresham's Law only applies to the second case, when exchange rates are fixed by decree at non-market values. There is nothing special about money here. I think it's obvious that any good that could only be legally sold at one fixed price, regardless of quality or type, would suffer the same result. This is just a special case of the more general observation that goods imposed with a price ceiling will be in shortage whereas goods imposed with a price floor will be in surplus.
A-R:This is just a special case of the more general observation that goods imposed with a price ceiling will be in shortage whereas goods imposed with a price floor will be in surplus.
Thanks :-) This price-control answer is what I kept striking at without finding. My fault for not thinking about what I meant by 'peg'.
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