September 16, 2014
Ron Glantz
Director of Research
@RonGlantz
HISTORY OF CURRENCY DEBASEMENT
The history of currency has been a history of debasement. For example, the Roman
denarius contained approximately four grams of silver when it was first minted. By the
time it was discontinued, it contained less than 0.1 gram.
Fiat currencies have been no better. In 1918, the German mark fell from 4.2 to the dollar
to about eight, as Germany’s inflation began to rise. The government then really ran the
printing presses and the “witches’ Sabbath of inflation”1 began, causing the mark to fall to
4.2 trillion per dollar by November 1923. That was not the worst hyperinflation in the 20th
century. That honor belongs to Hungary (an absurd 41.9 quadrillion percent in July 1946).
Hyperinflation is still with us. Since 1990, inflation has exceeded 50% in 31 countries,
most recently Venezuela in 2013. Yugoslavian inflation peaked at 313 billion percent in
January 1994 and Zimbabwe inflation hit 7.96 billion percent in November 2008. With a
third of the Earth’s landmass covered in trees, paper money offers little protection.
The U.S. has also had extensive periods of double digit declines in purchasing power.
U.S. inflation averaged 16.4% in 1917-1920, even with a gold-backed currency, and 11.7%
as recently as 1979-81.
Fiat currencies originally were backed by precious metals. In the early 19th century, gold
prices rose in relation to silver, resulting in the removal of nearly all U.S. gold coins from
commerce. The Coinage Act of 1834 reduced gold content by 6%, creating a new U.S.
dollar backed by 1.5 grams of gold. In 1853, the weight of U.S. silver coins was reduced,
effectively placing the U.S. on the gold standard. The Gold Standard Act of March 14,
1900 guaranteed the dollar was convertible to 1.5 grams of gold.
The gold standard was suspended twice during World War I, when Europeans demanded
payment for their debts in gold, causing the dollar to plummet in value. Every major
currency left the gold standard during the Great Depression, as speculators demanded
gold in exchange for currency, forcing the Federal Reserve to raise interest rates to
protect the gold standard, worsening already severe domestic economic pressures. After
bank runs became more pronounced in early 1933, people began to hoard gold coins and
distrust of banks led to distrust of paper money, worsening deflation and depleting gold
reserves. In early 1933, in order to fight severe deflation, Congress and President
Roosevelt implemented a series of Acts of Congress and Executive Orders which
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Stefan Zweig, The World of Yesterday.
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suspended the gold standard except for foreign exchange, revoked gold as universal
legal tender for debts and banned private ownership of significant amounts of gold coins.
Executive Order 6102, which criminalized the “hoarding” of gold, required all persons to
deliver on or before May 1, 1933 all but a small amount of gold coin, gold bullion, and gold
certificates owned by them to the Federal Reserve in exchange for $20.67 per troy
ounce. The price of gold from the Treasury for international transactions was raised to
$35 an ounce in 1934.
Eventually the U.S. had to devalue the dollar. President Nixon issued Executive Order
11615 on August 15, 1971, ending the direct convertibility of dollars to gold. This became
known as the Nixon Shock and marked the dollar's transition from the gold standard to a
fiat currency.
A more subtle devaluation has taken place through substituting less-expensive metals in
coinage. For example, the dime, first minted in 1792, had its silver content reduced from
2.411 grams to 2.243 in 1853 and then eliminated entirely in 1965.
One of the common anti-bitcoin arguments is “bitcoin doesn’t have intrinsic value.” That
presumes paper currency has intrinsic value. That notion seems to ignore the 83%
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decline in the purchasing power of the U.S. dollar since 1970 (as measured by the
consumer price index).
Source: U.S. Department of Commerce
While the U.S. dollar has held up better than almost every other government-issued
currency, investors would have done better in gold, the stock market, jewelry, fine art, or
real estate; basically, anything which can't be printed.
Source: U.S. Department of Commerce
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