LeoGlossary: Debasement

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Debasement is the lowering the value of a currency. This is historically associated with coinage or specie.

There were a couple ways debasement takes place with coinage.

Traditionally, people would engage in clipping, which was cutting slivers off the coin. The effect was the lowering of the weight. Here is where the commodity value of the money declined.

Governments and others who had control over the mint also used debasement of coinage. This was done by using an alloy in newer coins. This resulted in the formation of Gresham's Law proposing that bad money drives out good money. Since the newer coins were lower in metallic value, it was undervalued as compared to the other coins. With legal tender, the government could force merchants to accept the new coins as payment. It also accepted them for taxes eventually leading to the circulating supply to be overrun with the newer coins.

The belief is hoarding also takes place.

Since coins tend to be made from precious metals such as gold or silver, the mixing of base metals lowers the commodity content. Here is where government exploited seigniorage. It also effectively put a tax on the population through the money supply.

Paper Currency

Coinage was the main for of currency before paper money. Since the introduction of banknotes, we see the topic of debasement misinterpreted.

Certainly, if a government creates too much of its currency, known as money printing, then debasement could result due to the inflation of the currency. This will reduce purchasing power since prices will be pushed higher.

The reason this is often misinterpreted is because debasement of the currency has to come from an expansion of the money supply. Under fractional reserve banking, which most of the world utilizes, governments are not the ones who create the currency. Central banks took over that process when banknotes came into existence.

However, even they got pushed aside as digital money became the norm. Since most transactions are either electronic in nature, we effectively use digital forms of the fiat currency (USD, EUR, JPY). This is under control of the commercial banks who expand the money supply through the making of loans.

While central banks such as the Federal Reserve still control the production of banknotes, it is the commercial banks who actually make the call on how much they desire. This ends up on as vault cash when put into circulation, something that is a major hassle for the banks.

As technology changes, so does money. This affects some of the characteristics of what took place when money was in a different form.


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