A Brief History Of Silver, Debasement, And Inflation

Debasing money is the oldest trick in the book for governments to get themselves out from under debts that cannot be paid back. This trick is literally thousands of years old. But, as you might expect, don’t expect a government official to come out and tell you what they are up to. You have to be smarter than that, and just remember that fiscal belt-tightening or tax increases are often too difficult for any regime or government to implement: so, essentially, governments cheat and just fire up the printing press, or in an earlier time, they mess with the precious metal content of the coinage when debts get out of control.

Inflation is very much a part of the Silver Story. Silver has been used as money in more places and by more people than gold, and it is in the silver coins themselves that we see the process of debasement, or what is usually thought of as inflation. To take the example of the United States, the 40% silver half dollars of 1968 contained far less silver in them than the first American silver half dollar, the Flowing Hair Half Dollar struck in the 1790s. Going back further, when Persia conquered Babylonia in 539 BC many historians estimate that the silver shekel contained sixty percent less silver than the same coin from a couple of centuries before. Among the Greeks, we read in histories of the city states that silver coins were constantly being taken out of circulation and returned with newer issues containing less silver. Debt problems are not new to the Mediterranean region.

Perhaps the best known case of widespread currency debasement in the ancient world occurred in the later stages of the Roman Empire. For more than 400 years the amount of silver in the denarius fell from 3% all the way down to less than .5% by 275 AD, a decline of over 80%. This debasement is widely seen as the classic result of imperial overreach– and a warning to many that even the greatest of empires cannot avoid the temptation to cheat savers out of the value of their currency.

Medieval Europeans also lived through numerous debasements of their silver coins over several centuries from 1250 to 1550. In the Ottoman Empire by the 1400s, the Emperor reduced the silver content of his akce silver coins, and tried to penalize anyone trying to sell the older, more valuable silver coins to people who might pay the prevailing, higher market prices further east. As is often the case with government restrictions, the existence of these laws likely indicated illegal smuggling of silver out of the empire (again another way for savers to protect the value of what they have saved.)

Even the most prosperous countries in Europe often succumbed to the temptation of currency debasement. Spain went through it more than once, as the empire began its slow decline after 1600. By the late 1700s, the Spanish peso, or “milled dollar” had been reduced in fineness from roughly 93% to less than 87% silver. Of course, this was done without much fanfare, but it is not a coincidence that this debasement of the Spanish peso paralleled the decline of the once-powerful Iberian state. Although it took longer for the British Empire to decline, the debasement of English sterling coins dated from at least the 1500s.

Another way to debase currency in medieval or early modern times came from the creation of paper money: money that is simply created by the state in whatever amount the state finds convenient to pay off debts to maintain the illusion of solvency. In the 1700s and 1800s, the French endured two very painful experiences with paper money, first in the late 1710s with John Law’s scheme, and the second during the French Revolution. After both exercises, paper notes became nearly worthless and governments began to institute laws to try to stop the mad rush being made by the populace into gold and silver.

But many scholars will actually tell you that paper money was first used by the Chinese nearly 1000 years ago. It didn’t last, though: hence the greater devotion of the medieval and early modern Chinese to silver. But paper money was seductive to others in Asia. The Monghol Ilkhamid Empire under Geikhatu (1291-1295) tried to reintroduce paper money on the Chinese model by attempting to ban the use of metal currency and force subjects to exchange metal money for the paper note called the ch’ao. The attempt failed with massive inflation and economic stagnation, and the following emperor, Ghazan, needed to mint a silver coin in order to restore confidence in the monetary system.

Even during the days when governments were supposed to be on a gold standard (meaning their currency to some extent was convertible into gold), it was still possible for governments to go off the gold standard. This amounted to devaluation. For example, Great Britain went off the gold standard during the Napoleonic Wars, its debt skyrocketed, and there was a severe shortage of silver and gold coins. This would eventually lead to the Great Recoinage of 1816, which aided Britain in maintaining a stable currency for nearly a hundred years. And yet by 1914, Britain was forced again to go off the gold standard due to the need for deficit spending to fight World War I.

If possible, governments will do what they can to hide the fact that they are debasing people’s savings. You have to admit that this makes sense from the perspective of a government trying to get away with the sleight of hand of stealing from savers.

The question becomes, are you going to let them get away with it?