Thiers' Law
Thiers' Law is the reverse of Gresham's Law: when people are free to refuse or discount a weak money, the stronger money drives it out of use. It describes what happens in high inflation, when residents switch to a foreign currency.
Also called: reverse Gresham's law · good money drives out bad · Thiers law
The label was coined by the economist Peter Bernholz, after the French statesman and historian Adolphe Thiers. Bernholz's history of inflations found Gresham's Law at work in the early stages, as debased coin or paper pushed better money out of circulation, and the reverse later on, once distrust of the inflating money became so great that people stopped accepting it in payment.
The difference between the two laws is enforcement. Gresham's Law needs a fixed rate between the two moneys, usually imposed through legal tender rules, so that bad money can be passed on at full value. Thiers' Law operates once that fixed rate breaks down: sellers price in the strong currency, or demand much more of the weak one, and the weak money loses its role as a medium of exchange. Penalties do not reliably stop it. During the French Revolution, merely asking which currency to pay in could bring a sentence in the galleys.
For payments businesses, Thiers' Law is the logic of dollarization. In a hyperinflation, or where the official rate and the parallel-market rate pull far apart, rents, wages and wholesale prices move into dollars or another hard currency. Demand for foreign-currency accounts, cash dollars and dollar stablecoins rises at the moment authorities are most inclined to restrict them.
In practice
Thiers' Law is a historical regularity, not a rule with a threshold. Once people have switched to a foreign currency they are often slow to switch back, even after inflation has fallen.
Example
In an economy with inflation of several hundred percent a year, a landlord who used to take rent in the local currency starts quoting in US dollars and accepts local notes only at that day's street rate. Within a year most large purchases are priced in dollars, and the local currency is used for small change and taxes.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Thiers' Law, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Gresham's Law | Gresham's Law is bad money driving out good under a fixed legal rate. Thiers' Law is good money driving out bad once people can refuse or discount the bad money. |
See also
- Gresham's LawGresham's Law is the tendency for overvalued money to stay in circulation while undervalued money is hoarded, melted or exported, when the law forces both to be accepted at the same face value. It is usually summarised as 'bad money drives out good'.
- DollarizationDollarization is the use of a foreign currency, usually the US dollar, in place of or alongside a country's own for saving, pricing and payment. It can be official policy or something households and firms do on their own.
- HyperinflationHyperinflation is an extremely rapid and accelerating rise in prices, conventionally defined as inflation above 50 percent a month. Money loses value so fast that people stop holding it and switch to goods or foreign currency.
- Parallel Market RateA parallel market rate is the rate at which a currency actually trades outside official channels, in a country where the official rate is not obtainable. In a tightly controlled market it is often the only rate at which real business clears.
- Hard CurrencyA hard currency is one that is widely accepted for international payment, freely convertible and expected to hold its value, such as the US dollar, euro, yen, pound sterling or Swiss franc. Suppliers abroad generally insist on being paid in one.