Thiers' Law

Thiers' Law is the observation that, when people are free to refuse a weak money or to accept it only at a discount, the stronger money drives the weaker one out of use. It is often summarized as "good money drives out bad", the reverse of the better-known Gresham's Law, which states that bad money drives out good. Thiers' Law describes what typically happens during high inflation and hyperinflation, when residents abandon the domestic currency for a stable foreign one.

The name refers to Adolphe Thiers, the nineteenth-century French statesman and historian, who described how gold and silver displaced the depreciating paper assignats during the French Revolution. The economist Peter Bernholz popularized the term in his studies of monetary regimes and inflation.

The two laws are not contradictory. They apply under different conditions:

• Gresham's Law operates when the law fixes an exchange rate between two monies, typically through legal tender rules. If a debased coin must be accepted at the same value as a full-weight coin, people spend the bad coin and hoard or export the good one, as seen under bimetallism and during episodes of currency debasement.
• Thiers' Law operates when that fixed rate cannot be enforced. Sellers refuse the weak money or demand much more of it, so the strong money becomes the preferred medium of exchange and the weak one falls out of use.

In short, Gresham's Law describes which money people choose to spend; Thiers' Law describes which money people are willing to accept.

The pattern recurs in modern inflations. As domestic prices rise quickly, people first save in a foreign hard currency, then begin to price large items such as property and cars in it, and eventually use it for everyday transactions. Bernholz found that, in many historical hyperinflations, foreign currency displaced the domestic one before monthly inflation reached the 50% threshold commonly used to define hyperinflation.

Examples

• Germany, 1923: during the Weimar hyperinflation, foreign currencies and foreign-exchange-linked instruments were increasingly used in place of the collapsing mark.
• Latin America: repeated inflations in countries such as Argentina, Bolivia and Peru led to widespread holding and use of US dollars, and Ecuador formally adopted the dollar in 2000.
• Zimbabwe, 2008–2009: after the Zimbabwe dollar's hyperinflation, transactions shifted to the US dollar and South African rand, and the authorities allowed multiple currencies to circulate.
• Digital assets: in recent years, dollar stablecoins such as Tether (USDT) have offered a new channel for the same behavior in high-inflation economies, sometimes described as crypto-dollarization.

When Thiers' Law takes hold, the domestic currency loses its roles as unit of account, store of value and medium of exchange, usually in that order of reliance on the foreign alternative. Demand for domestic money falls, which speeds up price rises and shrinks the revenue the government can raise by printing money, known as seigniorage. This reduces the scope for monetary financing of deficits and often forces a stabilization program, such as a new currency, a currency board, a peg or full dollarization.

Governments sometimes try to resist the process with capital controls, restrictions on holding or using foreign currency, or forced conversion of foreign-currency deposits. Such measures attempt to restore the conditions under which Gresham's Law applies, but they tend to push transactions into parallel markets and the informal economy rather than restoring confidence in the domestic money.

Thiers' Law is an empirical regularity, not a precise rule. The speed of currency substitution depends on how easily people can obtain the foreign money, legal penalties, the cost of switching, and habits. Some economies remain heavily dollarized long after inflation has fallen, a phenomenon known as hysteresis, because contracts, savings and prices remain anchored to the foreign currency. Others with high inflation retain the domestic currency for small transactions while using foreign currency for larger ones, a partial form of capital flight into foreign assets.