Debasement
Debasement is reducing the precious-metal content of coins while keeping their face value, so that the issuer can strike more coins from the same metal. It works as a hidden tax on holders of money and was the classic historical route to inflation.
Also called: currency debasement · coin debasement · debasing the coinage · Great Debasement
A mint could debase by lowering the fineness of the alloy (more base metal, less silver or gold), by lowering the weight of each coin, or both. Either way, each pound of silver brought to the mint produced more coins of the same nominal value, and the ruler kept much of the difference as profit. Holders of money, and creditors repaid in the new coins, bore the cost as prices rose.
England's Great Debasement is the standard case. It began under Henry VIII in 1544 to pay for war in France and continued under Edward VI until 1551. Over that period the fineness of English silver coin fell from the sterling standard of 92.5 percent to 25 percent, and the pure silver in a pound of coin fell from about 153 grams in 1526 to under 26 grams in 1551. The recoinage under Elizabeth I that began in 1560 restored the 92.5 percent standard.
Debasement is the ancestor of modern monetary financing: the issuer pays its bills by creating more money rather than raising taxes or borrowing. It also sets up Gresham's Law, because old full-weight coins and new light ones circulate side by side at the same face value, and the good ones disappear. The modern equivalent for a payments practitioner is a currency losing purchasing power faster than its official exchange rate admits, which ends in a parallel market or, at the extreme, hyperinflation.
In practice
Not every cut in metal content was predatory. Mints sometimes reduced coin weights to keep them in line with a rising market price for silver, so that the coins were not worth more melted down than spent.
Example
In 1526 the London mint turned a pound weight of fine silver into about £2.43 of coin. By April 1551, with the alloy cut to 25 percent silver, the same pound of silver became £14.40 of coin, roughly six times as much money from the same metal.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Debasement, with more detail and background.
Read “Currency Debasement” on Money Wiki (opens in a new tab)
Commonly confused with
| Term | How it differs |
|---|---|
| Devaluation | Debasement cuts the metal content of coins at the same face value. Devaluation cuts the official value of a currency against other currencies or against gold. |
See also
- Gresham's LawGresham's Law is the tendency for overvalued money to stay in circulation while undervalued money is hoarded, melted or exported, when the law forces both to be accepted at the same face value. It is usually summarised as 'bad money drives out good'.
- Monetary FinancingMonetary financing is a central bank funding government spending directly, by lending to the state or buying its debt when issued, with newly created money. Many legal systems prohibit it because of its link to high inflation.
- HyperinflationHyperinflation is an extremely rapid and accelerating rise in prices, conventionally defined as inflation above 50 percent a month. Money loses value so fast that people stop holding it and switch to goods or foreign currency.
- DevaluationDevaluation is a deliberate official reduction in the value of a currency that is fixed or managed against another. It makes exports cheaper and imports dearer overnight, and is usually forced by reserves running too low to defend the old rate.
- BimetallismBimetallism is a monetary standard in which the currency unit is defined by fixed amounts of both gold and silver, and the mint coins both metals at a legal ratio. It works only while that legal ratio stays close to the market price of the two metals.