Definition
When two kinds of money have different real value but the law treats them as equal, people hide the good money (the one worth more) away and spend only the bad money (the one worth less). So only the bad money keeps circulating in the market. Today the term is also used more broadly, for any case where poor-quality goods or people push out the high-quality ones.
Why You Spend the Old Bill First
Say you open your wallet and find a crisp new 10,000 won bill and a crumpled one. Which do you spend first? Most people hand over the old bill and keep the new one tucked away. Both bills say 10,000 won, but you value the clean one more.
The same thing happened back when people used gold and silver coins. In the 16th century, the English crown ran short of money. It started minting huge numbers of coins with cheaper metal mixed into the silver, so they held less precious metal. Yet the law still counted each one as equal to one of the old, good coins.
So people hid their original coins, which held more precious metal, deep in a chest. Others melted them down or sent them abroad. At the market, they paid only with the coins that held less. In the end, only the lower-value, bad money was left in circulation.
What "Bad Money Drives Out Good" Really Means
In 1558, Thomas Gresham, a 16th-century English financier, wrote to Queen Elizabeth I to warn her about this problem. But it was the economist Henry Dunning Macleod who named the idea after him, in 1858. The old saying is that "bad money drives out good." The key word is "drives out." It means to chase something away and force it out. In other words, bad money chases good money out of the market.
When a government forces two kinds of money to count as equal on paper, people naturally save the one with more real value inside. They try to pass the weaker one along as fast as they can.
So whenever the price on paper and the real value come apart, the thing with the higher real value keeps vanishing from the market. It's a side effect that shows up when laws or rules try to push down what the market would naturally decide.
To Be More Precise: From Money to Society
To be more precise, this law holds only when the government fixes the exchange rate or the price. If the market could freely value a pure gold coin and a debased coin differently, the gold coin would simply sell for more. It would never disappear from the market.
Today, Gresham's law is also a powerful metaphor for many parts of society, far beyond money. A common example is the used-car market. Good cars rarely come up for sale, while broken cars ("lemons") pile up. Economists call this a "market for lemons." When it's hard to tell what you're really buying, good products get pushed out.
The same goes for workplaces and online communities. When sensational, false fake news floods in, careful and truthful information gets buried. In an organization that rewards people who are good at office politics but not at their jobs, the real talents who quietly build their skills tend to leave.
Common misconceptions
Gresham's law means poor-quality goods always beat good ones.
In a free, competitive market, good products tend to survive. Gresham's law happens when a government forces two kinds of money with different real value to be used at the same price. A similar effect, where good products get pushed out because buyers can't tell the real quality, has its own name in economics: the market for lemons.
Where you meet it
In a used-car market, more and more cars look fine outside but are broken inside. People who own good used cars stop putting them up for sale.
As sensational fake news floods in, deep and accurate real articles get buried and fail to catch readers' attention.
In one sentence
When two things carry the same price on paper, the more valuable one gets tucked away and only the less valuable one circulates. In the end, the bad pushes out the good.