DEFINITION of 'Debasement'

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

BREAKING DOWN '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.

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.

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.

RELATED TERMS
  1. Base Metals

    Base metals such as aluminum, copper and zinc are widely used ...
  2. USD

    The USD is the abbreviation for the U.S. dollar.
  3. Fiat Money

    Fiat money is currency considered legal tender, but it lacks ...
  4. Gold IRA

    A Gold IRA is a retirement investment vehicle used by individuals ...
  5. Currency

    Currency is a generally accepted form of money, including coins ...
  6. Monetary Reserve

    A monetary reserve is a central bank's holdings of a country’s ...
Related Articles
  1. Investing

    Precious Metals Funds: A Golden Opportunity?

    Used intelligently, precious metals can help an investor obtain decent returns in a terrible market.
  2. Investing

    Is Silver The New Gold?

    With silver on the move, gold could quickly become yesterday's news.
  3. Investing

    Looking for a Vanguard Gold ETF or Mutual Fund?

    Explore a detailed analysis of the Vanguard Precious Metals and Mining Fund, and learn about its characteristics, modern portfolio statistics and suitability.
  4. Trading

    Understanding Taxes on Physical Gold/Silver Investments

    Physical gold and silver holdings are taxed when sold-- here's how the cost basis is calculated, and ways you can offset taxes owed.
  5. Trading

    3 Positive Long-Term Charts for Precious Metals

    Bullish precious metal chart patterns suggest that the coming weeks and months could be profitable for commodity traders.
  6. Trading

    Forex: World's Biggest Market A Relative Newcomer

    Unlike the stock markets, the forex market is a truly new market. We’ll take a brief look at its origins and how it works today.
  7. Investing

    5 Metals That May Be Brighter Than Gold

    Many metals could be better investments than gold because they're more versatile and aren't as tied to investor sentiment.
  8. Investing

    The Most Affordable Precious Metals ETFs

    Precious metals ETFs invest in both physical commodities and futures contracts for precious metals.
  9. Investing

    VGPMX: Vanguard Precious Metals And Mining Fund Performance Case Study

    Discover the basic information about Vanguard Precious Metals and Mining Fund and learn about the historical performance of the fund's price.
  10. Investing

    How Gold Affects Currencies

    Learn about the strong correlation between gold's value and the strength of currencies trading on foreign exchanges.
RELATED FAQS
  1. Is fiat money more prone to inflation than commodity money?

    Learn more about commodity and fiat money and some of the differences between them. Find out when the U.S. abolished the ... Read Answer >>
  2. What is the gold standard?

    Learn more about the gold standard, including its complicated global history and its connection to the fiat system and the ... Read Answer >>
Trading Center