At some point in the past few days I acquired an unusually decrepit--even for Rwanda-- 2,000 franc note (~$4); not only is it nearly torn asunder, but it's also missing a quarter sized chunk at the top of the bill. So is it still worth 2,000 francs? The National Bank of Rwanda would say yes, but common sense says no: damaged money is less valuable than its freshly-minted brethren. This leads to a phenomenon known as Gresham's law, which Wikipedia outlines as follows:
Gresham's law is commonly stated: "Bad money drives out good", but more accurately stated: "Bad money drives out good under legal tender laws."
Let's say the government issued a 100% gold coin with a face value of a dollar. After a few mintings, however, the government decides to increase its seigniorage by minting a new series of dollar coins, but this time with only 50% gold. Now two coins are circulating about the economy, and both must be accepted as worth $1 in any transaction. But the citizenry knows one coin has twice as much gold in it as the other and is thus more valuable, so they will hold on to the full-gold coin and use the half-gold coin as much as possible. Soon enough, all full-gold coins will have disappeared, having been driven out by the less valuable but legally equal half-gold coin. In my real-world case, I utilized my full measure of clever to swap out my bad note with a good one in a bank deposit for my wine company.
And now that we're speaking of wine again (weird, huh?), I've come across an inverse wine corollary to Gresham's law, as explained to me by a restaurant manager as I replenished his supply. Since buying our wine, the manager had instructed his pseudo-sommelier first to get rid of his old inferior stock from another supplier. For whatever reason, however, our good stuff drove out of circulation the bad stuff, of which he has hardly been able to sell a drop.