Even if you don’t immediately know what it means to debase a currency, you probably think it doesn’t sound very good. You’d be right – it’s not a good thing.

Currency debasement is the intentional reduction in the value or purchasing power of a currency. Historically, it meant a reduction in the precious metal content of a currency’s coinage. Obviously, the debasement of a currency is a governmental action, not something that a private party can do.

However, it is vital that savvy investors understand what currency debasement is, and – more importantly – what it can mean for one’s investment portfolio moving forward. So, let’s discuss how it happens, why it happens, and some historical examples of currency debasement.

What currency debasement is not

Now, we’ve already defined currency debasement, but we should also clarify what currency debasement is not. Quite simply, there are a lot of terms in economics and numismatics, and it’s easy to get one thing confused for another.

So, here are some things that currency debasement is not:

Inflation – This one is a bit tricky, as the two are closely linked. However, to be perfectly accurate, inflation is the sustained rise in the general price level. Many factors may contribute to inflation, including currency debasement.

Devaluation – Devaluation is the deliberate lowering of a currency’s exchange rate under a fixed or managed exchange-rate regime.

Deflation – Deflation is a sustained decrease in the general price level, typically associated with contractions in the money supply. In fact, deflating the currency often increases the value of the currency – but has some undesirable side effects (like recessions) that make it an unpopular scenario, particularly for politicians looking to keep their jobs.

Hyperinflation – Hyperinflation is extremely high inflation. Economists tend to classify inflation as hyperinflation when prices rise by 50% or more in a single month. Hyperinflation can certainly be a consequence of extreme debasement, but the two are distinct situations from one another.

Historical Examples

Currency debasement has occurred many times throughout human history. As a government’s needs change or its ability to provide wanes, debasement is often a self-preserving measure. Some of those debasements have been minor and have passed without much attention, but others have been well-documented. Here are some of the more prominent examples.

The Roman Empire

The Roman Empire is likely the best example of a historical civilization that we can see in complete relief and perspective. It was one of the first “modern” civilizations, and many of its innovations are either still active or have heavily influenced the conventions of today.

However, we also look to the Romans to track the centuries-long decline of the empire. One of the biggest signs that things were going south in Rome was the debasement of its currency, the denarius, over the course of roughly three centuries.

Ironically, Rome’s incredible expansion of its empire—and later, the increasing costs of defending such vast territory—was a major cause of its currency debasement. The need to pay Roman soldiers to guard the larger imperial footprint imposed an increasing burden on the emperor’s coffers.

So, in 64 AD, Nero – yes, the famous fiddler – debased the denarius from its previous silver content levels. The ~95% purity seen in Pax Romana denarii dropped to around 90%.

To be fair, Nero also debased the currency so he could pay for his own vanity projects. However, subsequent emperors followed suit and further stripped the denarius of its silver content over the next few centuries.

By the 3rd century AD, the Roman denarius, and the coin that came to replace it, the antoninianus, bore no more than 2% silver and was primarily a bronze (copper) coin. In fact, the silver layer on top of the coin was so thin as to wear off easily.

The Weimar Republic

Germany emerged from World War I as the clear and unequivocal loser. The country itself emerged from World War I as a nominal representative democracy. Due to the location of its formation meeting, it came to be known as the Weimar Republic.

However, Germany had been forced to sign the punitive Treaty of Versailles in early 1919 under the threat of a full-scale invasion by the Allies. The Treaty of Versailles was nothing short of a punishment for Deutschland, and required the surrender of territory, restrictions on the German military, and – worst of all – incredible financial reparations.

At the time, the treaty demanded that Germany repay 132 billion gold marks — equivalent to several trillion dollars in today’s terms (commonly estimated between $4–$7 trillion depending on methodology) — over the next few years to cover civilian property losses. The German economy was already struggling after, you know, losing a war against the rest of the world, so it was ill-prepared to make these payments whatsoever.

After the Weimar Republic missed a reparation payment in 1922, France and Belgium sent a joint armed force into the Ruhr Valley, which was Germany’s primary industrial area. The French sought to confiscate industrial assets to make up for the missed payments.

In response, the Republic ordered its industrial workers to resist the French passively by refusing to work with the occupying force. The German authorities pledged to pay the striking and resisting workers, but doing so presented a logistical problem.

With the Ruhr Valley offline, the country’s economic output shrank even further, and there simply wasn’t any money to pay the formerly productive workers. So, they did what many governments do – print money on a massive scale.

The result of the debasement – massive hyperinflation – was devastating to the German economy. A loaf of bread that cost 250 marks in January 1923 rose in price to an incredible 200 billion marks by November 1923, for example, and the prices of other household items easily exceeded 1 trillion marks. During this period, workers were often paid twice daily because the value of their pay had dropped significantly.

Needless to say, the German people became incensed at the astronomically high prices. Many riots broke out, including a failed coup d’etat in Munich. This failed takeover attempt, nicknamed the Beer Hall Putsch, was conducted by a growing political group known as the National Socialist German Workers’ Party.

We know them better as the Nazis. While the debasement of the mark didn’t directly cause the rise of the Third Reich, it certainly contributed to the ire that would grow and eventually drive the party to its internal popularity.

Modern Causes of Currency Debasement

These days, currency debasement is quite common. The final end of the gold standard in 1971 meant that all currencies began to derive their values from their national economies and from their relative values to one another. So, here are some of the causes of modern currency debasement:

Financial stimulus: Governments often implement stimulus packages or quantitative easing to allay fears during economic downturns. These policies typically expand the money supply, either directly or indirectly, through central bank actions.

High national debt and/or budget deficits: The need to fund new initiatives, policies, or plain pork-barrel projects leads many governments to borrow money. When central banks support this borrowing through monetary expansion, the currency may become debased.

Low interest rates: Lower interest rates lead to increased borrowing, and commercial banks create new money through lending. To maintain liquidity and support economic activity, central banks may further expand the money supply. Nevertheless, the currency tends to get debased during these periods.

To be fair, currency debasement isn’t a malicious act on the part of the government. In fact, it often forms a regular part of monetary policy.

Economic Consequences

However, whether monetary policy is regular or not, currency debasement has undeniable consequences for the overall health of the economy. There are several worrying impacts that currency debasement creates, including:

Declining purchasing power: With each piece of currency worth less than before, the prices of everyday items necessarily rise to cover their own production costs.

Savings and portfolio erosion: Steady assets kept as savings or in portfolios don’t receive increases that compensate for currency debasements, so the savings and stability of investor portfolios only grow less valuable.

Wage value erosion: Wages do not automatically grow to keep up with a debasing currency and the resulting inflation, so working people are paid less and less, with no change to the numbers on paychecks.

Increased focus on hard assets: Currency debasement makes investors seek out tangible assets to preserve the value of their wealth, such as real estate and precious metals.

Ironically, in earlier periods, declining supplies of precious metals sometimes led governments to debase their currencies. In fact, Roman emperors’ need for silver content to pay for their pet projects was the precipitating cause for the debasement of the denarius.

Precious Metals as a Hedge

As mentioned, currency debasement often leads investors to seek out gold and silver to serve as bulwarks against the resulting devaluation and inflation. Gold, silver, and other precious metals retain their value because of their tangibility, their rarity, and their natural scarcity.

Because there’s only so much of each metal, each piece is necessarily valuable on its own. Recent examples of investor moves toward precious metals as a hedge include the 2008 quantitative easing and the 2020 pandemic stimuli, as we observed price spikes in gold (and silver) during both periods.

Overall, precious metals offer terrific hedging potential for investors. Certainly, we at JM Bullion are big supporters of them.

However, to be fair, precious metals should not be the entirety of your investment portfolio. Instead, you should make them a component of a broader financial strategy.

If you’d like to add some gold, silver, or other precious metals to your investments, though, we’re happy to help. Give us a call at 1-800-276-6508. We’re here for your call on weekdays between 8 AM and 6 PM Central.