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Debasement is the act of issuing more currency than is demanded by the economy. Debasement leads to a lowering of the value of money. Face value of the currency remains but its purchasing power decreases.

Debasement leads to two outcomes. Firstly inflation rises as producers demand higher prices for the same amount of goods. This can lead to economic hardship if individual income cannot keep up with the inflation. In a runaway inflation where prices rise exponentially, people cannot even afford basic necessities. One example is inflation in Weimar Germany.

Another outcome is loss of confidence to the currency. There are many outcomes in this situation. One possibility is where hoarding of other currencies or valuables such as gold and silver take place. Trade can no longer function because valuables are hoarded. The debased currency that previously served has a mode of exchange is no longer wanted. In simple cases, barter trade replaces trade using money. Black markets spring up while price controls and some form of parallel or black market pricing exist side by side.

In extreme situations, this can lead to collapse in society as the trading and distribution of goods and services become disrupted even though there is no shortage. This is because merchants cannot agree on the price of goods and no exchange takes place.

A recent example of debasement is the US Dollar. The rally in Gold and Silver prices as well as booming sales of bullion suggests that hoarding and seeking protection is happening. Confidence in the US Dollar is shaken.

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Q: What does debasement of currency to to an economy?
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