Gresham's Law is an economic principle that originated in the 16th century, attributed to Sir Thomas Gresham, a financial agent of Queen Elizabeth I. The principle states, "Bad money drives out good." This means that when there are two forms of money in circulation, both accepted by law as having similar face value, the more valuable money (good money) will be hoarded and disappear from circulation, while the less valuable money (bad money) will remain in use.
Throughout history, this phenomenon has been observed numerous times. For example, in the 19th century, the United States experienced this when silver coins were hoarded after the introduction of less valuable paper currency. Another instance occurred in Europe during the transition from gold coins to lower-value alloy coins, leading people to save their gold coins and spend the less valuable ones.
Central Bank Digital Currencies (CBDCs) are emerging as a significant development in the financial world. While they offer benefits such as improved payment efficiency, reduced transaction costs, and enhanced financial inclusion, they also represent a form of "bad money" in the context of Gresham's Law. As CBDCs are introduced, they may drive out traditional forms of money (considered "good money") from circulation, especially if these digital currencies are seen as less stable or less desirable by the public.
In light of Gresham's Law, investing in pre-1981 one cent pieces presents a unique opportunity. These U.S. pennies, made primarily of copper (95% copper, 5% zinc), have intrinsic value due to their metal content, unlike post-1981 pennies which are mainly zinc with a thin copper coating. As "good money," these copper pennies are likely to be hoarded and removed from circulation. With copper prices on the rise, holding onto these pre-1981 pennies can be a smart investment, offering a hedge against the influx of "bad money" like CBDCs.