When a country has substituted credit money or fiat money for metallic money, because the legal equating of the over-issued paper and the metallic money sets in motion the mechanism described by Gresham's Law, it is often asserted that the balance of payments determines the rate of exchange. But this also is a quite inadequate explanation. The rate of exchange is determined by the purchasing power possessed by a unit of each kind of money. Ludwig Von Mises
About This Quote

This quote is a reference to Gresham's Law, a 16th-century economic theory which states that bad money drives out good. In the context of this quote, it is a reference to the fact that bad money drives out good money. For example, if a country has been experiencing a run on their currency due to massive inflation, then people will begin to hoard their currency in fear that their banknotes will be worthless when the government attempts to print more notes. This makes it harder for businesses to trade in order to get money, causing businesses to lose their customers and eventually go out of business.

Source: Theory And History: An Interpretation Of Social And Economic Evolution

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