Page "Medium of exchange" Paragraph 14

Although the unit of account must be in some way related to the medium of exchange in use, e. g. coinage should be in denominations of that unit making accounting much easier to perform, it has often been the case that media of exchange have no natural relationship to that unit, and must be ' minted ' or in some way marked as having that value.

Also there may be variances in quality of the underlying good which may not have fully agreed commodity grading.

The difference between the two functions becomes obvious when one considers the fact that coins were very often ' shaved ', precious metal removed from them, leaving them still useful as an identifiable coin in the marketplace, for a certain number of units in trade, but which no longer had the quantity of metal supplied by the coin's minter.

It was observed as early as Oresme, Copernicus and then in 1558 by Sir Thomas Gresham, that bad money drives out good in any marketplace ( Gresham's Law states " Where legal tender laws exist, bad money drives out good money ").

A more precise definition is this: " A currency that is artificially overvalued by law will drive out of circulation a currency that is artificially undervalued by that law.

" Gresham's law is therefore a specific application of the general law of price controls.

A common explanation is that people will always keep the less adultered, less clipped, sweated, less filed, less trimmed coin, and offer the other in the marketplace for the full units for which it is marked.

It is inevitably the bad coins proffered, good ones retained.