Debasement Reasons

September 6, 2009

Overview

Debasement is said to be the act of lowering/reducing the value of a particular currency by the government or by unscrupulous users of the said currency. It’s mostly used in association with article of trade money such as silver or gold coins. Thus, a coin is said to be debased if the quantity and quality of silver, gold, nickel or copper is reduced. A debased currency is a commonly used term to refer to anything whose value has been lowered or reduced substantially.

In other cases, debasement is used to refer to the propensity of gold or silver coins to be kind of ‘shaved’ through unscrupulous means i.e. some bits of the coins being shaved off the edges hence reducing the actual content of the gold or silver. To counter this, concerned authorities started to produce silver and gold coins with milled edges and the tradition has gone on until to date, although most coins today are no longer made of valuable metals like silver and gold.

Examples of Debasement

For instance, in Roman currency, the denarius coin progressively decreased in value over time as the Roman Government changed the silver content and the original size of the coins. Initially, denarius was made of almost pure silver that weighed around 4.5 grams but as time passed by, it was reduced. At the time of the reign of Julio-Claudian, the denarius had around 4grams of silver but was shrinked to 3.8 grams during the Nero dynasty. This process went on until the 2nd half of the 3rd century when the silver content in the denarius was only 2% silver, and was eventually replaced by argenteus. Another perfect example is the U.S dime on or before 1964. It contained 90% silver but at the beginning of 1965, the U.S dime had no trace of silver in it.

Reasons behind debasement

The first reason for debasement being practiced by a particular government is to gain financially at the expense of unknowing citizens. By shrinking, or rather reducing the gold, silver, or nickel content of a coin, the government in question is able to make more coins out of the materials produced. The other reason behind debasement is inflation whereby the government will be able to pay off its bonds. Nonetheless, the citizen’s living standards plus their purchasing power will be significantly reduced.

Economic Effects of debasement

As mentioned, debasement to a large extent reduces the value of the coin hence leading to inflation. As time goes by and debasement continues in a particular currency, it can even lead to the adoption of a new coin as the standard currency like what happened when the Ottoman Akce was eventually replaced by Krus due to debasement. The Krus was later to become a subunit of the Lira.

Currency Debasement in the modern day world takes place right at the central banks whereby the banks increase “print money” or money supply. Due to advancement in technology, ‘print money’ as it’s commonly known in the modern idiom, is done electronically.