How Money Becomes Worthless
How money becomes worthless is important to understand.
This page covers some of the primary ways that money loses great value.
• Ceasing to be legal tender.
This page also covers changing to a new currency and currency debasement.
Hyperinflation is inflation that is high, or out of control. It can be 26% a year or more. Runaway inflation can be as high as 50% per month or more. 5% - 10% or more hyperinflation per day has occurred.
This can be devastating for anyone who holds the majority of their assets in that countries currency. A large net worth can go to almost zero in a relatively short period of time.
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.
Money Ceases to be Legal Tender
A country defines that a particular money will no longer be legal tender. Here are some examples of gold and silver certificates ceasing to be legal tender.
• Gold CertificatesGold certificates were used from 1882 to 1933 in the US as a form of paper currency. The certificates gave the holder to a corresponding amount of gold coin(s).
In 1933 the government made it illegal to hold these notes until 1964. In 1964 the restrictions were lifted (primarily for collectors to be able to own the notes legally), however these notes only became legal tender with no connection to gold redemption. They have now become a collector’s item.
• Silver Certificates Silver Certificates were commodity money printed from 1878 to 1964 in the United States. They were originally redeemable for the same face value as silver dollar coins, and later in silver bullion.
Silver certificates were a true commodity money. The number of silver certificates in circulation matched the silver bullion in the treasury vaults. The notes were shredded as people redeemed the silver certificates for silver dollars or bullion. In essence these notes could not be re-circulated unless more silver was put into the vaults.
Silver Certificate legislation was abolished by Congressional Act June 4, 1963 and all redemption in silver was halted with the silver certificates by June 24, 1968.
Changing to a new Currency
During the changeover to the Euro from the various European countries made many of the currencies illegal. For example, the German Mark ceased to be legal tender after December 31st of 2001.
Note: Even after the official dates of becoming illegal tender some of the European countries continued to be accepted for exchange by national central banks. This was for varying periods—and indefinitely in Germany, Austria, Ireland, and Spain. Also the coins from those four countries along with Italy, and Finland remain exchangeable.
It is interesting to note that the national central banks could exchange the moneys but not ordinary people.
One more way on how money becomes worthless.
Currency debasement is the practice of lowering the value of money. It has been used by monarchs and politicians for thousands of years to minimize the burden of huge debts without inflicting major taxes on their subjects or citizens.
In other words, currency debasement is done for financial gain of a government over the expense of its citizens. Since the beginning of modern banking and the invention of paper money starting the 1600’s governments learned the power of the printing press to create money out of thin air.
Over time debased currencies can become worthless if the debit spending is great enough.
Final Thoughts - How Money Becomes Worthless
How money becomes worthless is an important topic for understanding what can happen to money if a government handles its monetary system poorly.
These events are concerning, but need to be understood when doing long term
and sound Wealth Management.
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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