Debasement

Debasement is the practice of lowering the value of currency. It is particularly used in connection with commodity money such as gold or silver coins. A coin is said to be debased if the quantity of gold, silver, copper or nickel is reduced.

For example, the value of the denarius in Roman currency gradually decreased over time as the Roman government altered both the size and the silver content of the coin. Originally, the silver used was nearly pure, weighing about 4.5 grams. From time to time, this was reduced. During the Julio-Claudian dynasty, the Denarius contained approximately 4 grams of silver, and then was reduced to 3.8 grams under Nero. The Denarius continued to shrink in size and purity, until by the second half of the third century, it was only about 2% silver, and was replaced by the Argenteus.

Because of huge wealth, the Vijayanagara empire issued large quantities of gold coins. Harihara-I and Bukka (the founders of the famous Vijayanagar empire in South India) minted gold coins using debased gold. Gold fanams (a type of coin) and its fractions were minted by them for medium end transactions.

One reason a government will debase its currency is financial gain for the sovereign at the expense of citizens. By reducing the silver or gold content of a coin, a government can make more coins out of a given amount of specie. Inflation follows, allowing the sovereign to pay off or repudiate government bonds. However, the purchasing power of the citizens’ currency has been reduced. Another reason is to end a deflationary spiral.

Debasement was also the result of the value of the precious metal content rising above the face value of coins. As the market price of precious metal rose, the intrinsic value of coins would eventually rise above the face value and so a profit could be made from using coins as bullion rather than monetary instrument. This gave an incentive to money changers and mint masters to practice illegal debasement via clipping and sweating. Coins would also be melted down and exported. To anticipate these illegal debasements and preserve the quality and quantity of coins, the king would either debase or cry up the coinage (i.e. raise the face value of coins). Thus, debasement had its legitimate purposes and was welcome by the population if done to preserve the stability of the coinage

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Wikipedia