Original author: Tyler Durden
Original compilation: Block unicorn
Currency devaluation
Devaluation is the act or process of reducing the quality or value of something. When talking about fiat currencies, devaluation historically refers to the practice of reducing the precious metal content of a coin while keeping its nominal value constant, thereby diluting the coins intrinsic value. In the modern context, devaluation has evolved into a decrease in the value or purchasing power of a currency - such as when a central bank increases the money supply, reducing the nominal value of each unit in the process.
Understand depreciation
Before the advent of paper money and coins made of cheap metals like nickel, currency consisted of coins made of precious metals like gold and silver. These were the most popular metals of the day, and their value exceeded government decrees. Devaluation is a common practice to save precious metals and mix them with less valuable metals.
This practice of mixing precious metals with lower-quality metals meant authorities could create more coins of the same face value, expanding the currency supply at a fraction of the cost of coins with higher gold and silver content.
Today, coins and banknotes have no intrinsic value, they are simply tokens that represent value. This means that devaluation depends on supply: how many coins or notes the issuing institution allows to circulate. Over time, devaluation has also gone through different processes and methods. Therefore, we can define old and new methods.
traditional method
Before the advent of paper money, clipping, slashing, and jamming of coins were the most common devaluation processes. Such methods are used by both malicious actors who counterfeit coins and authorities who want to increase the number of coins in circulation.
Cropping involves shaving the edges of the coin to remove some of the metal. As with erosion, the resulting debris will be collected and used to create new counterfeit coins.
Cutting involves vigorously shaking the coins in the bag until the edges of the coins fall off and fall to the bottom. These pieces are then collected and used to create new coins.
Blocking, on the other hand, is a method of punching a hole in the middle of a coin and beating the remainder to seal the hole. It is also possible to saw a coin in half and remove a piece of metal from the inside, then fill it with cheap metal and finally fuse the two halves together again. These techniques were not phased out until advances in modern coinage technology.
modern approach
Increasing the money supply is a modern method used by governments to devalue their currency. By printing more money, the government gets more money to spend, but this leads to inflation for its citizens. A currency can be devalued by increasing the supply of money, lowering interest rates, or implementing other measures to encourage inflation; they are all good ways to reduce the value of a currency.
Why does money lose value?
The government devalues the currency in order to obtain spending without further raising taxes. Devaluing currencies to fund wars was an effective way to increase the money supply and engage in costly conflicts without affecting peoples finances - or so it was thought.
Whether through traditional currency devaluation or the modern method of printing money, an increase in the money supply can have short-term benefits that boost the economy. But in the long term, this can lead to inflation and financial crises. This impact is felt most directly by those in society who do not have hard assets to counteract losses from currency devaluation.
Malicious actors introducing counterfeit currency into the economy can also cause currency devaluation, but in some countries the consequences of getting caught can result in the death penalty.
Inflation is legal counterfeiting, counterfeiting is illegal inflation. - Robert Breedlove
There are steps that governments can take to mitigate the risks associated with currency depreciation and prevent economic instability and weakness, such as by controlling the money supply and interest rates within specific limits, managing spending, and avoiding excessive borrowing.
Any economic reforms that increase productivity and attract foreign investment help maintain confidence in the currency and prevent currency devaluation.
real world examples
Roman Empire
The first example of currency devaluation dates back to around 60 AD in the Roman Empire under Emperor Nero. Nero reduced the silver content of dinar coins from 100% to 90% during his term.
Emperor Vespasian and his son Titus invested heavily in post-civil war reconstruction projects, such as building the Colosseum, compensating victims of the eruption of Vesuvius, and the Great Fire of Rome in AD 64. The means chosen to survive the financial crisis was to reduce the silver content of the dinar from 94% to 90%.
Titus brother and successor Domitian saw sufficient value in hard currency and the stability of a reliable money supply, so he increased the dinars silver content to 98% - when another war broke out , he had to reverse this decision. And inflation once again enveloped the entire empire.
This process gradually continued until the silver content was only 5% over the next few centuries. As the currency continued to depreciate, the empire began to experience severe financial crises and inflation - particularly in the third century AD, sometimes referred to as the Crisis of the Third Century. During this period, from 235 AD to 284 AD, the Romans demanded higher wages and higher prices for the goods they sold in response to the devaluation of their currency. The era was characterized by political instability, the pressure of external barbarian invasions, and internal problems such as economic decline and plague.
It was not until Emperor Diocletian and later Constantine took various measures, including the introduction of new coins and price controls, that the Roman economy began to stabilize. However, these events highlighted the fragility of the once-powerful Roman economic system.
Ottoman Empire
During the Ottoman Empire, the akçe, the official monetary unit of the Ottoman Empire, was a silver coin. The silver content dropped from 0.85 grams in coins in the 15th century to 0.048 grams in the 19th century. Measures taken to reduce the intrinsic value of coinage are taken in order to create more coinage and increase the money supply. New currencies, the kurushe in 1688 and the lira in 1844, gradually replaced the original official currency, the Akche, due to its continued depreciation.
Henry VIII
Under Henry VIII, England needed more money, so his chancellor began using cheaper metals like copper to lower the price of coins so that more coins could be made at a more affordable cost. Towards the end of his reign, the silver content of the coins dropped from 92.5% to only 25%, in order to make more money and fund the huge military expenditures required for the wars in Europe at the time.
Weimar Republic
During the Weimar Republic in the 1920s, the German government met its war and postwar financial obligations by printing more money. The measure reduced the marks value from about 8 to 184 marks per dollar. By 1922, the mark had devalued to 7,350 marks to the dollar, eventually collapsing in painful hyperinflation when the mark reached 4.2 trillion marks to the dollar.
History is a profound reminder of the dangers of monetary expansion. These once-mighty empires serve as cautionary tales for modern fiat institutions. As these empires expanded their money supply and devalued their currencies, they were in many ways like the proverbial frog in boiling water. The temperature—or in this case, the rate of currency devaluation—increases so gradually that they dont realize the impending danger until its too late. Just as the frog seemed unaware that if the water temperature rose slowly it would be cooked alive, these empires did not fully appreciate their economic vulnerability until their systems became unsustainable.
The gradual erosion of their monetary value was not just an economic problem; it was a symptom of deeper systemic problems, signaling the decline of a once-mighty empire.
modern currency devaluation
The disintegration of the Bretton Woods system in the 1970s marked a critical moment in global economic history. The Bretton Woods system, established in the mid-20th century, loosely linked the worlds major currencies to the U.S. dollar, which itself was backed by gold, ensuring a certain degree of economic stability and predictability.
However, its dissolution actually freed money from its golden roots. This shift gives central bankers and politicians greater flexibility and discretion in monetary policy, allowing for more active intervention in the economy. While this newfound freedom provides tools to deal with short-term economic challenges, it also opens the door to abuse and gradual economic weakness.
Following this dramatic change, there were significant changes in U.S. monetary policy and money supply. By 2023, the monetary base has soared to $5.6 trillion, an increase of approximately 69 times from $81.2 billion in 1971.
As we reflect on the current era and the significant changes in U.S. monetary policy, it is critical to heed these lessons from history. Continuous devaluation and uncontrolled monetary expansion can only continue for so long, until the system reaches a breaking point.
The impact of devaluation
Currency depreciation can have a variety of significant effects on the economy, the extent of which depends on the extent of the depreciation and underlying economic conditions.
Here are some of the most impactful consequences that a long-term currency devaluation can have.
rising inflation rate
Rising inflation is the most direct and influential effect of currency devaluation. As the value of a currency decreases, more units are required to purchase the same goods and services, thereby reducing the purchasing power of the currency.
interest rates rise
Central banks are likely to respond to currency depreciation and rising inflation by raising interest rates, which could affect borrowing costs, business investment and consumer spending patterns.
Savings value deteriorates
Currency depreciation may reduce the value of savings held in the domestic currency. This is particularly detrimental to individuals with fixed-income assets, such as retirees who rely on pension or interest income.
More expensive imported products
A weaker currency could make imported products more expensive, which could lead to higher costs for businesses and consumers who rely on foreign goods. However, it may also make exports more internationally competitive, as foreign buyers can purchase domestic goods at lower prices.
Undermining public confidence in the economy
Continued currency depreciation could undermine public confidence in the national currency and the governments ability to manage the economy effectively. This loss of trust could further exacerbate economic instability and even hyperinflation.
Devaluation solution
The solution to currency devaluation lies in the reintroduction of sound currencies – currencies whose supply cannot be easily manipulated. While many nostalgically long for a return to the gold standard, which is arguably superior to contemporary systems, it is not the final solution. The reason is central bank centralization of gold. If we return to the gold standard, history may repeat itself, again leading to confiscation and currency devaluation. Simply put, if a currency can be devalued, it will be devalued.
How Bitcoin Avoids Depreciation
Bitcoin provides a permanent solution to this problem. Its supply is capped at 21 million, a number that is hard-coded and secured through proof-of-work mining and a decentralized node network. Due to its decentralized nature, no single entity or government can control the issuance or governance of Bitcoin. Additionally, its inherent scarcity makes it resistant to the inflationary pressures typically seen with traditional fiat currencies.
As a distributed system, Bitcoin users can ensure that the supply never deviates from a predetermined supply cap by running software that downloads and verifies the entire transaction ledger. By verifying every transaction in Bitcoin’s history, and the origin and destination of every coin, users can be absolutely certain that the supply has not been devalued and no coins have been created that they shouldn’t have.
Bitcoin full node software like this is essentially an anti-counterfeit detection machine that anyone can run. It guarantees that the supply is intact, coins spent are properly authorized, and nothing ridiculous happens. Any Bitcoin wallet software ensures that no one can restrict your access to your money.
During times of economic uncertainty, or when central banks engage in massive money printing, investors often turn to assets like gold and Bitcoin for their store-of-value properties. Over time, it will be possible for people to realize that Bitcoin is not just a store of value, but the next evolution of money.
