P05 The system makes good money disappear
Forcing acceptance of coins of different fineness at the same nominal value → Currency choice, capital flight
What do people do when forced to accept two items of different value at the same price?
Gresham's Law, with institutional conditions
Four Steps
When a system forces people to accept two currencies of different intrinsic value at the same nominal value, they will hoard the better one (if it can be freely exchanged on the market, it does not simply disappear).
In the past, the difference in fineness; now, the choice between currency and assets. The refuge has shifted from metal to the market.
Currency choice is the sum of individual rational decisions, not a matter of morality.
⚠ When applying "Gresham's Law" to situations lacking the condition of a fixed exchange rate.
These are the four steps for going beyond "it's similar." The "limitations" step defines the point beyond which historical analogies should not be drawn.
Read at the Modern Money Stations
Stations from the textbook "Modern Money: Whose Debt Is It?" where this structure appears. The four steps for each station are not displayed on the screen in the textbook. Here, you can read them side by side.
The Three Tests of Money — Uniformity, Elasticity, and Soundness
8-06 / Digital June 29, 2025 Basel
- Similarities
- Whether it can be redeemed at face value is the same question people asked daily when local banknotes circulated at a discount.
- Differences
- The entity imposing the test is an international organization, and the subject is a bearer instrument on a public ledger.
- Applications
- When reading discussions on digital money, apply the three tests in order. In particular, first ask: "Is it settled on the central bank's books?"
- Limitations
- The assessment of the report is as of June 2025. It is subject to change with regulatory developments. The design of the unified ledger is not covered.
Why can the receipt of banknotes not be refused?
1-02 / Modern Money Present. Tokyo. Bank of Japan Act, Article 46.
- Similarities
- The state's mark serves to reduce the recipient's doubt. Both the Lydian stamp and Article 46 perform the same function.
- Differences
- The stamp guaranteed the content of the material. The legal article does not guarantee the material, but guarantees its circulation and price stability.
- Applications
- If you wonder, "Is this money?", check the legal text to see who mandates its acceptance and what the limits of that obligation are.
- Limitations
- Legal tender concerns the extent to which yen-denominated debts can be settled with legal currency. This authority does not cover a shop's freedom to determine payment methods in advance, nor the freedom of pricing or using foreign currency. The twenty-coin limit is a value from Japanese law; it differs in other countries.