Thiers' Law

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Thiers’ law states that good money will drive out bad money. Thiers’ law is the complement of Gresham’s law, which states that “bad money drives out the good”.

Thiers’ law is most applicable when a currency loses so much value that it is no longer accepted as a means of payment by merchants. In most countries, legal tender laws make it illegal to reject the local currency as a means of payment, but these laws become ignored and obsolete under conditions such as hyperinflation.

While Thiers’ law and Gresham’s law seem contradictory, they are not. When citizens are free, they tend to accept and use good money, characterized by its ability to store value and serve as a medium of exchange. When they are denied the choice, usually by legal tender laws, individuals will hoard the good money and spend the bad money as rapidly as possible.

However, legal tender laws can only protect bad money for so long. Eventually, the bad money will degrade to near worthlessness, and citizens will ignore legal tender laws. During Zimbabwe’s hyperinflationary period, many citizens resorted to using U.S. dollars despite their prohibition, and many foreign currencies circulated in the Weimar Republic during the 1920s.