Wow, Gresham's Law! This thing is so insidious, it creeps into your craw and just won't get unstuck. If you haven't been exposed, take a look at this fabulous historical review of said law. It turns out Aristophenes said it first: like is so often the case, some Greek speakers already wrote it down a two or three thousand years ago.
Many of you will have your first exposure to this adage, as perhaps "law" is a bit too strong, in coming to grips with the rise of public coin. Why do people still use fiat coin? Well Gresham tells us why. Sort of. In fact the thing isn't 100% clear by any means but there is a nugget of truth in there, which in fact can be extended analytically, or at least I am going to try to convince you of that.
First, let's restate the darned thing: "When good or bad commodities can both be used for equal exchange, people choose to use the bad ones." Of course, this requires us to say what we mean by good and bad in this context, and also what is meant by "can exchange". But we can paraphrase the whole thing first by saying: "if one can be lazy, often one is lazy".
You see "good commodities" are ones that are "dear" to you, that is - which require more work for you to create and have available. Limited in supply, for example. Bitcoin and Gold need to be mined, a tortuous process. Dollars however, the virtual/paper variety, can be created out of nothing at no cost - ad infinitum. Sure, some folks are required to take debt burdens when doing so (haha, suckers), but even for those folks - that debt burden is in the future right? For now, lazy says: get a loan. Lazy says: counterfeit money. Use that. And so as long as people are willing to accept your lazy money, your credit or printed paper or virtual T-bill or whatever nom du jour, we will in fact prefer to use them. If we can't use them, somebody else (richer, on the right side of the interest rate apartheid wall) will and hey - a merchant, a worker, and a farmer - still might accept them. Thus we are all "forced" into it like a classroom catering to the lowest common denominator. Meanwhile, the people with a clue as to the fact that time continues to pass - who can think longer term and have the means - are stashing away the good stuff for later.
This is why Athens' valuable gold coins disappeared so quickly, and crappy counterfeits circulated. This is why Quantitative Easing will eventually make the folks who have been selected to receive the welfare - poorer. Wait what? How does giving somebody a billion dollars scot-free make them poorer? Well, it doesn't - at first. And perhaps not individually ever. But lets look at what happens to all their neighbors and their town. You hand out wads of benjies, shopkeepers gladly take them in, everybody feels like things are hunky dory. Benjies it is! Those who need benjies, like those who weren't primary recipients of the QE, then have to sell something of value. Like say, gold, oil, or bitcoins, to get some benjies. So good money flees the area, as those not connected or out of fiat luck are forced to exchange their heirlooms. When later people realize the benjies ain't worth shit, what now? Poorer than when started. All the (other) coin has fled. Cleanup will be done by volunteers. Gresham's law coming back to bite and boy is she a bitch.
It sounds counterintuitive. But lets move to the continuation.
Mr. Mundell (chanelling Aristophenes) actually starts things off for us in his essay by saying "bad politicians drive out good!". How could that be? Well sometimes you just need somebody to take the podium, look good, or whatever. If so, you'll take any body that comes by. Ronald Reagan? Sure! George Bush Jr.? Sure! It's work after all to find someone better, and in the end it doesn't matter because - they exchange for the same value.
Contrived? Perhaps. But lets take a look at a real doozy: organized religion. So you want to meet some locals, have a social life, get laid eh? I can understand that. Would you rather go through intense personal introspection and spiritual training, glimpsing the magnificent unknowable and reading ancient scripture to obtain enlightenment and pass a dangerous adulthood ritual? Or maybe just say "Jesus saves", throw a benjie in the pan, and step right in to look at the choir girls? Yeah I thought so. Organized religion is Gresham's law at work. Not opiate of the masses, but soapiate of the masses. Because they exchange for the same value, with that one choir girl. Maybe not with some other folks sure but hey, more on that later.
Want to be a musician? Well you could start by learning Bach preludes in all keys on a couple instruments, then move on to polyrhythmic rudiments, finally arranging Black Page compositions and finding a group that practices religiously to rehearse and perform your compositions. You would get a good following, I'm sure you could get laid. Or you could buy a shitty amp and turn it up to 10, put on distortion to hide the fact you don't know how to tune the instrument and put on some makeup. What'll it be? "Gresham's Groove" anyone?
Gotta buy beer for the boys? I'm pretty sure they'll be happy with PBR. White bread should be fine for the kiddies. You know, you'll get by with a Mac or a Windows machine. It might even be less work, because you won't have to google for "how to install linux". As long as you can find an idiot with which they "exchange for the same value".
And so we see that Gresham's law is sorta kinda a law about Ponzi schemes. As long as there is an idiot for which one can exchange good and bad goods "at the same value", we will use the bad goods.
You know what? Fuck Gresham. Since when did banality and mediocrity become a good image for your children? And in the end, as Mundell tells us: good money drives out bad. That's right, every action has an equal and opposite reaction. Because nobody remembers the girl who made "My neck and my back". Lazy doesn't really get you anywhere. We need to stop catering to the lowest common denominator. That's the only way to bring it up more quickly.