MONETARY DEBASEMENT
Debasement is the process or action that reduces the value or quality of something. In the context of fiat currency, the term debasement refers to a practice that involves reducing precious metals in coins, while maintaining their nominal value, and thereby lowering the intrinsic worth. In a modern context, debasement has evolved to mean the reduction in the value or purchasing power of a currency — such as when central banks increase the supply of money, in the process lowering the nominal value of each unit.
DEBASEMENT: WHAT IS IT?
Prior to paper money, coins were made from precious metals such as gold and silver. They were highly sought-after metals at the time and their value was beyond the decree of government. The practice of debasement is a way to cut costs on precious metals by using them instead in an alloy with lower value metals.
By mixing precious metals and a lesser-quality metal, authorities can create more coins of the same value at a fractional cost of coins containing higher gold or silver contents.
Coins and banknotes today do not represent intrinsic worth. They are mere tokens. Debasement is therefore dependent on the supply of coins and notes. How many notes or coins the issuing authority allows to circulate. The debasement process has changed over the years. We can therefore define both old and new methods.
TRADITIONAL METHOD
Before the advent of paper currency, the main methods for devaluing coins were coin clipping, sweating and plugging. Both malicious actors and authorities used these methods to counterfeit coins.
Clipping is not allowed “shaving” The edges of the coin to remove some metal. Like sweating, these clipped parts would be collected to produce new counterfeits.
Sweating requires shaking coins in the bag vigorously, until their edges fall off. These pieces can be collected to make new coins.
The plugging method was to punch a hole in the middle of the coins and then hammer the remainder of the coins together. A plug of interior metal could be used to saw the coin in half. The two halves are then fused together after the metal is filled in the gap.
MODERN-DAY METHODS
Modern governments use money supply increases to debase their currency. Printing more money gives governments more cash to spend, but inflation is the result for citizens. Devaluing currency can be done by increasing money supply or decreasing interest rates. “good” There are many ways to reduce the value of currency.
Why is money devalued?
The government debases its currency to be able to increase spending without having more taxes. Debasing money to fund wars was an effective way of increasing the money supply to engage in expensive conflicts without affecting people’s finances — or so it is believed.
Money printing or debasement, both of which are methods to increase the money supply have a positive effect on short-term economic growth. Long-term, inflation is the result. financial crises. Most affected by this is the society that does not understand. own Hard assets can be used to counteract the decline in currency value.
Malicious actors could debase currency by introducing counterfeit coins into an economy. However, in certain countries being caught may result in a death penalty.
“Inflation is legal counterfeiting, Counterfeiting is illegal inflation.” Robert Breedlove
The government can implement measures that will help to reduce the risks of devaluation and stabilize economies. For example, they could control money supply, interest rates, manage spending and avoid excessive borrowing.
Maintaining currency confidence and preventing devaluation is possible with any economic reforms that increase productivity, attract foreign investment and promote the economy.
REAL-WORLD EXAMPLES
Roman Empire
Around 60 A.D., the Roman Empire was ruled by Emperor Nero. During his reign, Nero decreased the amount of silver in denarius coinage from 100% to 90 %.
Vespasian’s son Titus spent a lot of money on the reconstruction of Rome after the civil war, including the construction of the Colosseum as well as compensations for the Vesuvius eruption and Great Fire of Rome. The choice of survival means. financial Crises was the reduction of silver in the “denarius” The 94% threshold has been reduced to 90%
Domitian Domitian was Titus’ successor and brother. Domitian saw the value of “hard money” and the stability of a credible money supply that he increased the silver content of the denarius back to 98% — a decision he had to revert when another war broke out, and inflation was looming again across the empire.
The silver content gradually decreased until it reached 5% over the next centuries. The Empire started to suffer severe financial crises and inflation as the money continued to be devalued — particularly during the 3rd century A.D., sometimes referred to as the “Crisis of the Third Century.” In this time period from A.D.235 until A.D.284, Romans increased their wages, and raised the prices of goods to compensate for the depreciation in currency. Political instability and barbarian invasions were external factors, while internal problems such as plague and economic demise were also present.
Only after Diocletian introduced new coinage, then Constantine implemented price controls and other measures did the Roman economy begin to stabilize. These events revealed the fragility of the Roman economy, which was once mighty.
Read More >> Hard To Soft Money: The Hyperinflation Of The Roman Empire
OTTOMAN EMPEROR
During the Ottoman Empire, the Ottoman official monetary unit, the akçe, was a silver coin that went through consistent debasement from 0.85 grams contained in a coin in the 15th century down to 0.048 grams in the 19th century. In order to increase coin production and money supply, it was necessary to devalue the coins. New currencies, the kuruş in 1688 and then the lira in 1844, gradually replaced the original official akçe due to its continuous debasement.
Henry VIII
Henry VIII wanted more money. His chancellor debased the coinage by using copper, a cheaper metal, to create more coins. In order to generate more revenue and pay for the high military costs of Europe’s war, Henry VIII reduced the silver content from 92.5% of coins to just 25%.
WEIMAR REPUBLIC
In the Weimar Republic, Germany met both its postwar and wartime needs. financial Printing more money will allow you to meet your obligations. This measure dropped the value of the mark from eight to just 184 marks. In 1922 the value of the mark was 7,350. It eventually collapsed in a painful way. hyperinflation When it reached USD 4.2 trillion, the mark was a staggering 4.2 trillion.
The history of the world is a powerful reminder of what can happen when monetary growth becomes uncontrolled. The modern fiat money system can learn from these powerful empires. In many ways, these empires, as they devalued and expanded their currency, were similar to the lobster in boiling water. The temperature — or in this case, the rate of monetary debasement — increased so gradually that they failed to recognize the impending danger until it was too late. The same way a slow-rising water temperature makes a lobster not realize that it is being slowly boiled, the empires did not grasp their full economic vulnerability until the system became unsustainable.
It was more than just an economic problem; the gradual decline in their value signaled a deeper, systemic issue.
DÉBASEMENT IN MODERN ERA
In the 1970s, the dissolution of Bretton Woods was a turning point in world economic history. The Bretton Woods System was established in the middle of the 20th century. It tied major currencies around the world to the U.S. Dollar, which is backed up by gold. This system ensured economic predictability and stability.
As a result, the golden roots of money were effectively loosened. The central banks and politicians gained more flexibility in their monetary policies, which allowed for aggressive economic interventions. This newfound flexibility provided tools for addressing short-term challenges but also allowed the misuse of these tools and the gradual weakening the economy.
The US’s monetary policies and money supply have undergone significant changes in the aftermath of this massive change. The monetary basis had risen from its 1971 level of $81.2 billion to $5.6 trillion by 2023. This represents a nearly 69-fold rise.
It’s important to remember these lessons as we look back on modern times and reflect upon the changes that have occurred in U.S. money policy. The system can’t continue to debase and expand unchecked for too long.
The Effects of Debasement
The effects of currency devaluation on an economy can be significant and vary in size depending on its extent, as well as the economic condition.
These are the biggest long-term effects that devaluation can produce.
Inflation rates are rising
Currency debasement has the biggest impact on inflation. The purchasing power of currency is eroding as the currency value drops.
Increased Interest Rates
In response to rising inflation and currency devaluation, central banks can increase interest rates. This could impact on borrowing costs, consumer spending and business investment.
Depreciation of savings
The value of your savings can be affected by currency devaluation. The devaluation of currency is a particular problem for individuals who depend on fixed income assets such as pensions or interest.
Costlier Imports
Depreciated currencies can increase the cost of imports, which could lead to increased costs for consumers and businesses who rely on imported goods. Exports may become more competitive as foreigners can buy domestic products at lower prices.
The Economy and Public Confidence
The devaluation of the currency can undermine confidence and affect the ability of the government to run the economy. The loss of confidence may exacerbate the economic instability. hyperinflation.
SOLUTION FOR DEBASEMENT
The solution to debasement lies in the reintroduction of sound money — money whose supply cannot be easily manipulated. The gold standard was undoubtedly superior to modern systems. However, many people are nostalgically wishing for its return. Central banks centralize gold. Were we to go back to the gold standard again, this would be a repeat of history, with confiscation, debasement and currency destruction. If a currency is depreciable, then it will.
Bitcoin and Debasement
Bitcoin provides a permanent answer to this problem. There are only 21,000,000 Bitcoins available, which is the hardcoded number. proof-of-work A decentralized network with nodes and mining. Bitcoin is decentralized, so no government or entity can have control over its governance or issuance. Its inherent scarcity also makes it resistant to inflationary pressures, which are typical with fiat currency.
By downloading and validating the transactional ledger, Bitcoin users are able to ensure the supply does not deviate from its pre-determined cap. Users can verify every Bitcoin transaction, including where each coin originated and went. This will ensure that there has been no devaluation of the currency and that coins have not been created.
This full node Bitcoin software is basically a machine for detecting counterfeiting that can be run by anyone. This software ensures that the coins are in good condition, were authorized and nothing is amiss. Bitcoin wallet software ensures that you can access your funds without restriction. own money.
When central banks are printing money in large quantities, they often use gold and Bitcoin as store-of value assets. Over time, Bitcoin may become more than a currency. store of valueAs the next The evolution of money
“This article is not financial advice.”
“Always do your own research before making any type of investment.”
Source: bitcoinmagazine.com