How Currencies are Debased

How currencies are debased provides a lens to see what the future may hold for many of the world’s fiat currencies.

This page covers some common debasing techniques by governments.

They include:

• Reducing the quantity of a commodity.
• Eliminating commodity backing.
• Deficit spending.
• Fractional reserve lending.
• Redenomination.

Reducing the quantity of a commodity
For commodity money such as gold and silver debasing occurs by reducing the quantity of gold or silver in the coin.

Coin Clipping
The Roman emperors, (who did not have paper money or printing presses) would engage in “coin clipping.” This was done by trimming some of the precious metal off of the edges of coins for resale somewhere else while leaving the face value of the coinage unchanged.

Coin clipping has occurred many times since the time of the Romans both publicly and privately by cons artists. To combat this issue mints mill the edge of gold and silver cons to make coin clipping easily detectable.

Lowering the Quantity of Gold or Silver in Coins
Lowering the amount of gold or silver in coins is another common practice throughout history.

For example, the Roman government gradually altered both the size and silver content of the Roman coin called the denarius without changing its denomination. Originally the silver coin was almost pure silver weighing about 4.5 grams. Over time it was reduced to only 2% silver. It was eventually replaced by the Argenteus.

In recent U.S. history, the dimes, quarters and half dollars from 1964 and before are coined from 90% silver (making them commodity money). From 1965 and forward, these coins changed to clad coinage. This makes the coins a Fiat Money(currency) and are only worth something because the government has decreed. it.

Note: Clad coinage has an inner core of copper, with outer layers of a silver-colored nickel-copper alloy. The clad layers are easy to see on the edges heavily worn U.S. coins.

How Currencies are debased by Eliminating Commodity Backing
By eliminating a commodity backing of a paper currency, the only backing is by government decree.

For example, silver certificate legislation in the U.S. was abolished by Congressional Act June 4, 1963 and all redemption in silver was halted by June 24, 1968.

Also, in 1971 president Richard M. Nixon took the U.S. off of the gold standard. From that day forward the United States has been on a complete Fiat Currency. A fiat currency is not backed by a commodity, it is only backed by government decreeing the paper currency is money. That was over 40 years ago.

How Currencies are debased by Deficit Spending
Fiat currency is debased when governments print excessive amounts of money. The Austrian school of economics believes that inflation occurs when the supply of money outpaces the demand for money. In other words, the greater the money supply, the greater the potential inflation pressures. I concur with this belief.

How Currencies are debased by Fractional Reserve Lending
By creating money out of thin air banks lend out much more money than they have in the bank. This can be a factor of 10 to 1 or more.

Consequently, only a fraction of what the bank has lent out must be held in reserves. The theory is that very few people will take out their monies at any given time. The fear that the government has is when there is a run on the banks and everyone wants there money at once.

This increase the money supply is significant.

Currency Redenomination
Redenomination occurs when a new unit of currency replaces an old unit. In other words, altering the face value of a currency without changing its foreign exchange rate is a redenomination.

Hyperinflation is frequently the cause of redenomination. A new unit replaces a fixed number of old units (usually a positive integer). These numbers can be as high as 10, 100, 1000 (or more) of the old units for one new unit.

Redenominations that are high enough render money worthless. This has occurred many times throughout history.

Final Thoughts - How Currencies are Debased
It should be noted that it is common for several of these debasement tactics may be implemented on a monetary system. This compounds the debasement of the money supply and accelerates the economic havoc that follows.

Currency debasement is a dangerous tool that has wrecked financial havoc throughout the centuries.

Understanding the cause and effects is important for effective Financial Planning Techniques and wealth management in these turbulent economic times we live in.

Also, critical thinking, problem solving and decision making are important skills needed to make good financial decisions.

If you need assistance in these areas please see the sister site that was created to help strengthen these skills.
It is called: Problem Solving Techniques.

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