A lot has been written about Bitcoin and the regression theorem, but I haven't seen much written about Bitcoin and Gresham's Law.
The thought occurs that if a person is faced with the choice of paying with a depreciating currency or an appreciating currency, he/she would likely pay with the depreciating currency and choose to keep the appreciating currency in his/her cash holdings.
If this were to happen, it would/could suppress or inhibit the widespread use of the appreciating currency in commerce. People would hold the appreciating currency as part of their cash holdings and trade with their stock of depreciating currency. Obviously, if given a choice, people would prefer to give away that which is declining in value and hold on to that which is increasing in value.
"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)
Adam Knot:Again, I'm not talking about Gresham's Law narrowly interpreted, but what you refer to as "Gresham Effects." The exchange rate is "fixed" not permanently by government, but temporarily by the exchanges such as Mt. Gox. Meanwhile, the buyer who holds both bitcoins and dollars believes that the value of bitcoins will appreciate significantly relative to the dollar.
The exchange facility does not have the power to "fix" the exchange rate.
It is just a venue where people post their own bid-ask quotes.
The value right now in the exchange is the market value of a currency-pair exchange rate and it aggregates all expectations from all traders on both currencies.
If everyone thought that bitcoin would sharply appreciate against the dollar soon, they would react right now, by dumping dollars and acquiring bitcoins.
That would quickly bring the dollar value of the bitcoin to the level where as many people felt as predisposed to buy or to sell, that is, the market value.
But of course, if you have private expectations about the future, you can act on it too.
Maybe you think dollar will eventually depreciate more and more, even if the market right now doesn't feel like it's going to happen.
In that case you should keep hoarding your bitcoins, regardless.
But that's your personal bet, that might or not payoff. It has little to do with Gresham's law.
About the "gresham's effects", they might occur due to transaction costs in dealing with several currencies, but they would not hold for a long time in an unhindered market, because sooner rather than later the arbitrageurs would find a way to profit from price disparities in the currencies.
In environments of high inflation, people hold hard money (which in many cases in 3rd world countries, are dollars), but this can only go on as long as there's still a market for the debased local currency.
After a while, when high inflation becomes hyperinflation, people only accept to sell in dollars or gold, and loans, jobs and business contracts are fixed in dollar value.
When I was a kid in Brazil, I remember that people only talked about real estate in terms of dollar, because the country was suffering from more than 400% inflation (and that was the official figure, the real one might have been more).
You're simply saying you reject any notion of a general phenomenon of Gresham's Law and only accept a particular, narrow, and concrete version of it. That is your personal opinion. However, the Wikipedia page on Gresham's Law is not constrained by your personal preference, and provides several variations and interpretations of Gresham's Law, which if read and understood, paints a picture of a more general economic law of which the narrow version is only one instance.
The principles of Gresham's law can sometimes be applied to different fields of study. Gresham's law may be generally applied to any circumstance in which the "true" value of something is markedly different from the value people are required to accept, due to factors such as lack of information or governmental decree.
The Nobel prize-winner Robert Mundell believes that Gresham's Law could be more accurately rendered, taking care of the reverse, if it were expressed as, "Bad money drives out good if they exchange for the same price.
What I'm calling 'gresham effects' might be very common things, like when we select coins of small denominations to put inside vending machines.
10 coins of a dime are less valuable then 2 coins of 50 cents, because they are so small and dificult to find inside pockets, and then count and handle, and they never ammount to useful amounts, so we generally don't want to hold them.
That's why we dump them on vending machines. Gresham's law.