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What is Debasement?

2016-11-09T15:13:36+00:00

The term 'Debasement' is included in the Economics edition of the Financial Dictionary. Get yours now on mazon in ebook or paperback format. Read more here...

When economists speak of debasement, they are referring to lowering the value of the money in an economy which is utilized to purchase goods and services. There are a number of ways that this can be done and has been accomplished throughout history. These include reducing the amount of precious metals in coins, eliminating the commodity backing, deficit spending, fractional reserve lending, and re-denominating a currency.

The practice of debasement by reducing the amount of precious metals in coins dates back to Roman times. The Imperial Roman government reduced both the amount of silver and the size of their denarius coins over time. They maintained the same denomination in the process. The silver coins began as nearly pure 4.5 gram pieces that finally had only two percent silver content left in them when they were replaced altogether.

The U.S. engaged in this same practice after 1964. Half dollars, quarters, and dimes had all contained 90% silver through that year. They were altered to clad coins with copper cores and a nickel copper plating beginning in 1965. This means they ceased to be commodity money and became Fiat money with value only because of government decree.

More recently, governments began debasing their currency by eliminating the currency’s commodity backing of silver and gold. The U.S. Congress abolished the silver certificate legislation in June of 1963 and stopped redeeming bills for silver as of June 24, 1968. The gold standard that had backed up U.S. paper bills died in 1971 when then President Richard Nixon abandoned the currency standard unilaterally. The U.S. and other developed nations have been using Fiat currencies completely since then.

Deficit spending is another means of debasement. As governments print excess bills or issue debt to pay for their spending, the engage in this. The dangers of this practice are that as the money supply increases, so too does inflation. The U.S. money supply has been tripled using this means in the years of the Great Recession from 2007 to 2012. The runaway government spending has increased U.S. federal debt four fold from the years 2000 to 2016 (from $5 billion to around $20 billion total).

Governments can also use banks in debasement. This practice is known as Fractional Reserve Lending. Banks are able to create money from thin air by loaning out significantly more money than they keep in reserves. Only a small percentage has to be kept on hand for the withdrawal of deposits. Money can be lent out versus kept on reserves to a factor of even ten to one. It leads to bank runs and bank panic if too many depositors attempt to withdraw all of their money at a time.

Currencies can be re-dominated by a government replacing an older unit of currency for a newer one. They do this by changing the currency’s face value without allowing its foreign exchange rate to be altered. This re-dominating often causes hyperinflation. As bill values are changed by 10, 100, 1000, or even higher amounts, inflation can increase exponentially as well. When re-denominations became sufficiently high, the currency finally becomes worthless. This devastating result has transpired numerous times in history, most recently in Zimbabwe.

The term 'Debasement' is included in the Economics edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.