Daniel Altman teaches economics at New York University's Stern School of Business and is chief economist of Big Think.
Last week, during the frantic hunt for the second suspect in the Boston Marathon bombings, CNN wrongly reported that a man had been arrested. The news network soon corrected its error, but not in time to avoid a chorus of "how could this happen?" from, mostly, other media. Their explanations centered mainly on the pressures of the 24-hour news cycle. But for the real reason, you'd have to ask Sir Thomas Gresham.
Gresham was an advisor to Queen Elizabeth I and an exceptionally wealthy London merchant. Having realized that British money was losing its value because of the shoddy coinage standards of the queen's predecessors, Gresham suggested she create a new, more trustworthy money that could not be confused with the old specie. This act -- though not the first of its kind in recorded history -- gave rise to what is now known as Gresham's Law: "Bad money drives out good."
The law makes a simple but powerful point: Why would you go to the trouble of obtaining genuine legal tender when, at a lower cost, you can get something that works just as well? Joseph Schumpeter may have explained the law best in his History of Economic Analysis, pointing out that "if coins containing metal of different value enjoy equal legal-tender power, then the ‘cheapest' ones will be used for payment, the better ones will tend to disappear from circulation."...