This tendency of an overvalued money to displace one undervalued is known as Gresham's Law, so called from Sir Thomas Gresham, master of the English mint under Queen Elizabeth. He first clearly formulated the principle, which, however, had long been recognized, that bad money drives good money out of circulation, or that "the cheaper money drives out the dearer." By bad money he meant worn and clipped coins, while good money referred to full-weight coins. The tendency to retain the bright new coin and to pass on to someone else the worn and underweight coin is familiar to everyone. But the law operates also, as illustrated by the early monetary history of this country, under the bimetallic system. When the coinage system was established in 1792 the law provided for the coinage of gold and silver at the ratio of 15 to 1. This ratio differed, however, from the market ratio, which was about 15 1/2 to 1. Gold being thus undervalued at the mint was not presented for coinage, while silver, being overvalued, was freely offered and became the sole metallic coin in circulation. In 1834 the legal ratio was changed to 16 to 1, but at this ratio gold was overvalued and soon gold coins displaced silver, the latter being melted down or exported and sold as bullion.
The operation of Gresham's Law has frequently been demonstrated also by the disappearance of coin as the result of the circulation of depreciated paper money. During the Civil War both the Federal and Confederate governments issued treasury notes to circulate as money. Such quantities were issued that they depreciated rapidly in value. Gold and silver coins disappeared from circulation because people could melt them down and exchange the bullion for these notes at their depreciated value. This process netted a substantial gain, since a dollar note would buy as many things as a silver or a gold dollar. These depreciated legal tenders thus became not only the sole medium of exchange, but also the standard of value, all prices being quoted in legal tenders instead of gold. Prices still depended, however, upon the value of gold. The value of the notes themselves, that is, what people were willing to pay for them, was quoted in terms of gold.