BCom 3rd Year Money Financial System Gresham Law Study Material notes In Hindi

BCom 3rd Year Money Financial System Gresham Law Study Material notes In Hindi: Good and Bad Money Definition of Gresham Law Scope or Gresham Law Bimetallism Method Paper Standard Method  When Paper Money and Coins Both are in circulation Exercise Questions Long Answer Questions Shore Answer Questions Following Statement True False  ( This Post Help You Good Marks In your Exam )

BCom 3rd Year Nature Importance Financial Money Study Material notes in hindi

GRESHAM’S LAW

Gresham’s Law was introduced by Sir Thomas Gresham. Sir Thomas Gresham was an economist, a well-known businessman of England and economic advisor of Queen Elizabeth I. During the reign of Queen Elizabeth the coins which were in use had depreciated. So new and full bodied coins were introduced in the market in place of old and depreciated coins. It was her belief that use of new coins would reduce the use of old coins. But it did not happen. Whenever new coins were put into circulation, they were not accepted by the market. It was a great matter of thought and consideration for Queen Elizabeth I. At last Queen Elizabeth I on the advice of her Prime Minister, Sir William Cecil gave responsibility to Gresham to find out the cause and solution of the problem.

After a deep and thorough thinking he came to the conclusion that “Bad Money drives good money out of circulation.” In order to understand Gresham’s law it is necessary to understand the meaning of goods money and bad money.

GOOD AND BAD MONEY

Let us explain the meaning of good money and bad money. Good money means that money which is of full value and any depreciation in it does not affect its economic value. Good money is usually bimetallic. Similarly in context to paper money, good money is that which is not worn or torn.

On contrary, bad money means the money which loses its original value due to depreciation or any other causes. According to bimetallism the money whose value is less that its internal value, it is called bad money. That paper moneys which is worn and torn is also considered bad money.

DEFINITION OF GRESHAM’S LAW

(1) According to Sir Thomas Gresham, “Bad money drives good money out of circulation.”

(2) According to Prof. Marshal, “An inferior currency, if not limited in quality, will drive out the superior currency.”

(3) According to John G. Ranlett, “A commodity that has a value inmonetary and non-monetary use tend to move to that use in which its value is higher. Making the definition of Prof. Marshall more explanatory, Prof. Kent said “If in any country two types of money are in use and though their market value being different, the government announces their same value.

Financial System Gresham Law

Circumstances in which Gresham’s law operate :

The  Following are the circumstances in which Gresham law operate :

(1) Human Nature : It is a common human nature that he discards the bad things and accept the good things, Due to this very reason when both good and bad currencies are available to him, he keeps the good one with him and allows the bad ones to circulate in the market.

(2) Hoarding of Money: Normally people have a saving tendency. Those who are interested in keeping their savings in terms of currencies in liquid form, they always try to keep the good money i.e. full bodied money.

(3) Melting of coins : At times it happens that the value of a specific metal for e.g. Gold or silver in the coin increases so much that its market value exceeds its internal value. In that case people start melting the coin to get original metal so that they can sell them to earn profit. For this purpose people often choose good money because good money are full bodied and fetch maximum profit.

(4) Foreign Payments : During foreign payments the coins are taken keeping in view their weighted and purity.

SCOPE OF GRESHAM’S LAW

According to Sir Thomas, the laws made by him were only applicable only for monometallic but after a deep study it is found that his laws are applicable to all metallic system.

(1) Under Monometallic Method : Under morometallic system only one standard currency is used that may be either gold or silver. For small payments cheap and light currencies are used which may be of different shape and size. When standard and full bodied coins are used then among them some of the coins remain new while some become old due to continuous use. Here Gresham’s law is applied. Old and depreciated coins are circulated in the market while standard and full bodie new coins are either hoarded by the people or are used in foreign transaction. As a result good currencies remain unused.

Thus when full bodied or standard coins as well as token coins are put in circulation or are prevalent in the market then these taken coinss become bad money while standard coins become good money. These token coin are frequently circulated in the market and it prevents the use of standard money or circulation of standard money.

For example, when both Queen Victoria’s coins as well as George VI coins were prevailing at the same time in India, the Indians considering Victoria’s coin to be a standard coin or rather say good money started hording them while the coins of George VI being believed to be bad money were put in circulation in the market. The reason was that the amount of silver in the coins of George VI was comparatively less than the coins of Victoria.

(2) Bimetallism Method : Under Bimetallism method, the standard coins of both golds and silver were in and they were unlimited legal tender money. There is a certain exchange rate which is fixed by the government

Now among both the metals if the value of any metal either gold or silver becomes more then the coins of they very metal becomes good money as 1 starts getting hoarded by the people instead of putting it in circulation in the market. This can be explained with the help of an example,

Suppose a country follows bimetallism system where gold as well as silver coins of equal weight with a fixed ratio of 1 : 15 are prevailing in the market that means 15 units of silver will be obtained in exchange of 1 unit of gold Now suppose the market value of silver decreases but the market value of gold remains unchanged then as a result the present ratio becomes 1 : 16 while the mint exchange ratio remains the same i.e. 1: 15 that means 16 silver coins can be obtained in exchange of 1 gold coin. Thus silver is regarded as bad money while gold coins become good money. Since under this system the malleability of the coins is done by free coins method therefore people start melting the coins so that in exchange of 1 unit 16 units can be obtained. Thus Gresham’s Law is applicable here.

(3) Paper Standard Method : Since paper money are in a form of paper they cannot be melted. it is not even wise to hoard it for future use. So Gresham’s law cannot be applied. But practically general public has the tendency to preserve the new notes and use the torn or ruptured ones in the market.

(4) When paper money and coins both are in circulation : When in a country both paper money and coins are in circulation then metal currency are regarded as good money so that even in adverse situation it can be melted to obtain at least some metal which must be having some market value. On contrary paper money is considered as bad money because it has neither any internal value nor can melted to get any metal. Here Gresham’s law is! applicable. Therefore people not only hoard the coins but they also melt them to earn extra profits.

Financial System Gresham Law

LIMITATIONS OR EXCEPTIONS OF GRESHAM’S LAW

Gresham’s Law is not applicable in all situations. There are certain limitations or exceptions to it. The following are the limitations or exceptions of Gresham’s Law.

(1) When demand of money is more than its supply: Sometimes in a country when the demand of money is more than its supply then Gresham’s Law is not applicable. The reason behind this is that for exchange both good! as well as bad money is required and if these good as well as bad money are not available then choice does not exist.

(2) When Banking system is developed in a country: When a country has a well developed banking system the people generally prefer to keep their savings in a bank and while depositing the money they are not concerned whether they are depositing the good money or bad money in a bank. Apart from this with a developed banking system maximum payments are made by cheque. So Gresham’s Law is less applicable in a developed banking system.

(3) When the Pulbic Boycotts Bad Money : If the bad money is boycotted publically then good money will be circulated in the market. During the period of internal war in America greenbacks paper money were issued which were boycotted by the general public of America. As a result gold coins remained in circulation in the market.

(4) When bad money is devalued : According to the theory of a renowned economist Professor Thomas, “if bad money is devalued in such a way that it appears valueless to the public then automatically good money will start prevailing in the market and Gresham’s law will not be applicable.

(5) When Bimetallism is adopted on International level: When the system of bimetallism is accepted by a particular country then for one metal the mint house rate and market rate may differ at a time. But when the same system is adopted by all the nations at a time then it becomes easier to key! both the rates similar. In such a case the law of Gresham’s is not applicable.

(6) When token coins are in circulation : As discussed earlier, the printed value of the token coins is far less than their internal value. When the token coins are in circulation in a particular country then due to the reasons that their quality is inferior Gresham’s Law is not applicable.

(7) When Public has faith on the government : When the public has faith in the government then Gresham’s law is not applicable. The reason behind this is not that people will believe that the government will have similar view for both good and bad currenceis.

EXERCISE QUESTIONS

 Long Answer Type Questions

1 Explain Gresham’s law. Also describe its limitations,

2. “Bad money drives good money out of circulation.” Explain this statement.

3. Explain Gresham’s law and distinguish between good money and bad money.

4. Define Gresham’s law. What are the circumstances under which the law operates? What are its exceptions ?

Short Answer Type Questions

1 Write any two definitions of Gresham’s law.

2. Describe any two circumstances to operate Gresham’s law.

3. Write in short the limitations of Gresham’s law.

III. Objective Type Questions

Choose the correct option

1 Bimetallism method is :

(a) Circulation of standard coins of gold and silver at the same time

(b) Circulation of two types of gold coins

(c) Circulation of standard coins of copper and brass

(d) None of the above

2. Which of the following is the exception of Gresham’s Law ?

(a) When demand of money is more than its supply.

(b) When banking system is developed in the country.

(c) When the public boycotts bad money.

(d) All of the above.

3. Who told “Bad money drives good money out of circulation”.

(a) Prof. Marshall

(b) Sir Thomas Gresham

(c) John G. Ranlett

(d) Prof. Kent

[Ans. 1. (a), 2. (d), 3. (b).]

Financial System Gresham Law

State whether the following statements are True or False :

1. Sir Thomas Gresham was an economist and a well-known businessman of England

2. Sir Thomas Gresham was an economic advisor of Queen Elizabeth

3. There is no any exception of Gresham’s Law.

4. Gresham’s Law is always applicable.

(Ans. 1. True, 2. True, 3. False, 4. False.)