Debasement of Currency

What is Debasement?
‍Debasement is the process of increasing money supply by which the value of the currency is typically reduced.
Background

In ancient and medieval economies, coins were made from gold, silver, and copper, and their value was implicitly linked to their metal content.
Rulers often debased currencies by reducing the amount of precious metal in each coin, either by clipping, alloying with base metals, or issuing more coins from the same quantity of bullion. This allowed governments to finance expenditures, often for wars.

The term 'inflation' gained prominence when economies shifted away from metallic standards to paper and deposit-based monetary systems. By the 20th century, 'inflation' became the dominant term used to describe the general rise in price levels, overshadowing the older concept of debasement, which was more closely associated with physical currency.
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Debasement - Word FrequencyInflation - Word Frequency

But just because the amount of currency is no longer expanded by changing its physical attributes, does not mean that it is not done by other means - by electronically adding numbers into a database. Just because this process is now more opaque does not mean we should give up on trying to measure debasement and its impact.
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Debasement versus Inflation

While both debasement and inflation involve a reduction in the purchasing power of money, they are not identical.

Debasement specifically refers to the increase in the money supply, often leading to a reduction in the intrinsic value, whereas inflation is the general rise in the price of goods and services.
Importantly, inflation measures price changes, not changes in the money supply itself, which affects all prices, particularly those of assets.
Why now?

Only since the early 2000s have we come to a more precise determination of how money is created, something that remains misexplained and misunderstood, even among economists and leaders in business and finance. These new insights allow us to revive and quantify 'debasement'.

As banks and governments have expanded the monetary base at an unprecedented pace during peace times, asset prices have often risen faster than consumer prices, a phenomenon not captured by traditional inflation metrics.
Re-establishing debasement helps clarify this distinction: debasement tracks the dilution of money's value through excessive creation, regardless of whether it immediately manifests as higher consumer prices. This difference is crucial for understanding long-term changes in asset values and for accurately measuring the true loss of purchasing power over time.
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The Debasement Index (DI)

The Debasement Index measures the rate at which currency devalues over time.

The DI is visually correlated to inflation, albeit not statistically significant on an annual basis. Debasement is one determinant of inflation, noticeable when levels are extreme. An exception is the mid-1940s, when the UK and US introduced price controls, which lowered inflation but led to brutal shortages. Similarly, the 1980s witnessed another major episode where debasement did not feed through to inflation, possibly due to the influence of Thatcherism and Reaganomics.


We can trace the DI all the way back to 1710 for the United Kingdom. Under the silver and bimetallic standard, ranging from the early medieval age to the early 18th century, debasement rose at a moderate pace.
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Then, we find that the index was roughly flat throughout the 19th century, albeit fluctuations were higher than they may appear on this logarithmic (exponential) chart. In some periods, such as from 1865 to 1883, the index saw an overall decline of c. 30%. This brings a caveat that, due to the disproportionately more devastating impact of deflation compared to inflation, the relatively harmless-looking flat periods were more volatile than they may appear on the chart.
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The index decoupled in 1914.

What does that mean?

We can interpret this as meaning that during the specie gold standard, close to the 'right' amount of money was created for the economy to function, whereas subsequent periods show rapid and persistent debasement.
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Without judgment, we ought to have an overdue discussion about the creation of money and its impact on the economy and society. In the meantime, we can explore the insights this index provides.

How is the Debasement Index Useful?
A case study of Gold
Debasement can help explain FX differentials

Another way to use the Debasement Index is with currencies. It may, in part, predict exchange rates far into the future, such as with the USD / CHF pair (in orange) and the respective Swiss Franc Debasement Index divided by the USD one (in blue).

Rate of change basis, 5 year moving average offset by 5 years

and much more.

Learn more

The Debasement Index has opened Pandoras box. It can reveal new insights about markets and economics. Yet, one must keep in mind that the index is a simplification and rough estimate. No index can provide a stable value over periods spanning centuries. It does, however, provide the most accurate long-term reflection of the 'value of currency' so far.

I look forward to publishing in great detail the mechanics and thought process behind it.

Subscribe to connect - a more concerted effort is needed to make sense of it all. Enjoy further insights on my blog in the meantime.