What is Debasement?

Debasement refers to lowering the value of a currency, particularly one based on a precious metal, by adding metal of inferior value.

Key Takeaways

  • Debasement refers to lowering the value of a currency.
  • Debasement gives more money to governments for spending while it results in inflation for citizenry.
  • In ancient times, debasement was implemented by mixing a lower value metal to the gold or silver content of coins. In modern times, governments debase a currency through monetary policy i.e., by increasing or decreasing the money supply.

Understanding Debasement

Debasement has been common throughout history. In ancient times, governments would debase their currency by adding a lower value metal to the gold or silver content of the coins. By mixing the precious metals with a lower quality metal, they were able to create additional coins of the same denomination, essentially expanding the money supply.

By debasing their currencies, governments believe they can meet their financial obligations more easily or have more money to spend on infrastructure and other projects.

Debasement holds negative consequences for the citizenry, however, in the form of inflation. This further benefits the government by making government debts easier to pay off.

Examples of Debasement

Roman emperor Nero began debasing Roman currency around 60 AD by reducing its silver content from 100% to 90%. Over the next 150 years, the silver content was reduced to 50%. By 265 AD, the silver content was down to 5%. When a currency is debased, sooner or later the citizenry catches on and begins demanding higher prices for the goods they sell or more wages for their work, resulting in inflation. In the case of the Roman Empire, the debasement produced annual inflation of around 1,000%.

Today, most currencies are fiat currencies and are not based on a precious metal. So, debasement only requires that the government print more money, or since much money exists only in digital accounts, create more electronically.

In Germany in the early 1920s, the government reduced the value of the mark from around eight per U.S. dollar to 184 per U.S. dollar by printing money to meet its financial obligations. By 1922, the mark had depreciated to 7,350 per U.S. dollar. It eventually collapsed, reaching 4.2 trillion marks per U.S. dollar, before Germany returned to the gold standard.