Currency debasement occurs when a government reduces the intrinsic value or purchasing power of its money. Historically, this meant literally reducing the precious metal content in coins. Today, it happens through excessive money creation.
Historical Examples
- Roman Empire: Emperors gradually reduced the silver content of the denarius from 95% to less than 5%
- Pre-1965 U.S. Coins: Silver was removed from circulating coinage in 1965
- Modern Era: Central banks create trillions of dollars through quantitative easing
The U.S. Dollar’s Purchasing Power
Since the Federal Reserve was created in 1913, the U.S. dollar has lost over 96% of its purchasing power. A dollar from 1913 would need to be worth approximately $30 today to buy the same goods.
Gold’s Response
Gold has historically appreciated in response to currency debasement. As the supply of fiat currency increases, the price of gold — measured in that currency — tends to rise.