The Great Debasement

The Great Debasement (1542–1551) refers to the English Crown’s policy of coinage debasement during the reigns of Henry VIII and Edward VI. Coinage debasement occurred when governments replaced to a significant degree the gold or silver content of coinage with a base metal such as copper. By reducing the value of gold or silver content relative to face value, governments extracted usable revenue from domestic money stocks. This stratagem was called debasement because each coin was worth less in terms of its precious metal content.

Normally, the face value of the coined money exceeded its production cost, including the cost of the precious metals. This difference, which the Crown earned as a profit, was called seigniorage. The Crown of England, like many governments, held an exclusive monopoly on the privilege to coin money from precious metals, and used the profits of seigniorage to help pay for government expenditures.

During the Great Debasement the English crown’s profits from debasement rose to unreasonable levels. In March 1542 the value of the silver content of each English coin averaged 75 percent of each coin’s face value. By March 1545 the value of the silver content had fallen to 50 percent, and by March 1546 to 33.33 percent. The value of each coin in silver content fell to only 25 percent of face value by the time the debasement had run its course in 1551.

During a period of coinage debasement, a mechanism called Gresham’s law comes into play. Gresham’s law is sometimes expressed as bad currency drives out good currency. Households and businesses will hoard the good (or undebased) coinage, and use the debased coinage to pay for goods and services. The result is that only the debased currency remains in circulation, and the good currency goes into hiding or is spent on goods from foreign countries where the debased currency is not legal tender and therefore not acceptable.

In 1551 the English government under Elizabeth I instituted a plan to retire the debased currency and replace it with currency the face value of which corresponded with its precious metal content. Because of Gresham’s law, retiring the debased currency was a tricky affair because households and businesses tend to hoard good coinage and pay debts with debased coinage. To retire the debased currency the government enacted laws forbidding the outflow of good coinage to foreign markets, and ending the legal-tender status of the debased coinage beyond certain date.

During the gold standard era governments achieved the same purpose as debasement by increasing the paper money in circulation relative to the gold bullion held in reserves. Debasement, like printing excess paper money, was a secret form of taxation that monarchs could impose, often without receiving the approval of representative bodies such as Parliament. The secret tax made itself felt by increasing prices relative to measures of wages and other incomes.

An apologist for the debasement policies of the English Crown might point to the need to build up the English navy, and finance other public defense expenditures. Critics would answer that Henry VIII was fond of building palaces. Whatever the driving force of debasement, the public gradually lost faith in the ability of governments to manage money supplies without oversight from private financial sectors that are affected by monetary mismanagement. In the United States a quasi public-private agency, the Federal Reserve System, regulates the money supply, largely independent of the executive and legislative branches of government. Studies have shown that in the 1970s countries with independent monetary authorities experienced lower inflation rates than countries with monetary authorities dominated by government authority.