CapitalAccount's video: Word of the Day: Gresham s Law

check us out on Facebook http://www.facebook.com/CapitalAccount Follow us @ http://twitter.com/laurenlyster http://twitter.com/coveringdelta Time now for Word of the Day where we break down a financial term for our smart viewer but maybe not the financial expert. Given our conversation with about money and coinage with Kevin Phillips, the word of the day is Gresham's Law. So what exactly is it? According to Investopedia it is a monetary principle stating that "bad money drives out good." But it is actually a bit more complicated than "bad" versus "good." When a new coin is issued, and a legal authority (such as a government) artificially overvalues the new money, and undervalues another, and as more and more of this new currency enters the system, people take their old undervalued coins and pull them from circulation. One recent example is when the composition of the penny changed in 1982. The penny was 95 percent copper and 5 percent zinc until 1982 when it was changed to 2.5 percent copper and 97.5 percent zinc. Now the value of the older pennies is well over two cents, which is why we see people hoarding pre-1982 pennies. Although in 2006, the US Mint passed a rule that banned melting coins, due to rising metal prices. And it is illegal to transport more than 500 pennies out of the country as well. In 2006 the US Mint issued a statement proclaiming "There is concern that speculators could remove pennies and nickels from circulation, and sell them as scrap for profit." Here's an older example of Gresham's Law: in the 17th and 18th century Great Britain was on a silver standard, but when the Master of the Mint, Sir Isaac Newton, established a new mint ratio of silver to gold, overvaluing gold and undervaluing silver. No surprise, silver began to disappear and gold flowed into the country. Now Gresham's law can be applied to more than just coinage, perhaps politics and forms of capitalism as well, where the cream never rises to the top.