Amid all the outcries about quantitative easing in the US and the sovereign debt crisis in Europe, a small piece of news out of Germany almost went unnoticed. Let me correct that oversight, since it reinforces my view that we cannot trust governments when it comes to managing the printing presses for cash, or, in this particular case, the minting machines for coins.
Under the bureaucratic haze of a necessary "adaptation of technical parameters," Germany's Finance Ministry, which runs the country's mint, announced that it plans to massively reduce the silver content in its commemorative ten-euro coins. The last two commemorative German coins were minted earlier this year to mark 175 years of the German railway and the 2011 Downhill Ski World Cup. They weighed 18 grams and used an alloy of 92.5% silver and 7.5% copper. From next year on, new coins will consist of only 62.5% silver and 37.5% copper and they will weigh just 16 grams. Reducing the silver content of the alloy and the overall weight of the coins drops the total amount of silver per coin from 16.25 grams to 10 grams. That's nearly a 40% debasement in one go.
Since 16.25 grams of silver was worth 11.10 euros on 12 November, the German Finance Ministry was actually making a EUR 1.10 loss on the ten-euro coins. With the new coins, the Finance Ministry will garner a profit of EUR 3.20.
Debasing the silver value of its coins in this way, the German Finance Ministry is honoring an ancient tradition of minters, one that goes back to the dawn of cash money. The Roman denarius, a silver coin, was used as a means of exchange for over five hundred years. Originally, it constituted a day's wages for a soldier or a laborer but it too went on an extreme diet over the centuries. Its 4.5 grams of silver content in the third century BC, slipped to 3.8 grams under Emperor Augustus in 16 AD, 3.2 grams under Nero in 60 AD, 1.66 grams under Caracalla in 217 AD, and finally to 0.2 grams under Aurelian in 270 AD. From Augustus to Aurelian, the overall debasement of the denarius amounted to roughly 95%, corresponding to an average inflation rate over those 270 years of 1.1% per year.
However, inflation was rather volatile during this period, with periods of rapid debasement and even phases of re-basement, which would correspond to deflation in modern economics. The latter usually occurred when Rome enjoyed a rich conquest and could plunder the silver reserves of a vanquished foe. From 250-270 AD, debasement accelerated dramatically, leading to an equivalent average inflation rate of roughly 10% per year and launching some early attempts at an overall currency reform.
The French King Philip the Fair (1268-1314) was another legendary currency debaser ("fair" refers to his looks, not his business ethics). Always short of funds due to his numerous wars, he first expelled the Jews from France and then the Lombards, confiscating their assets; then he levied unprecedented and highly contentious taxes on the Catholic Church and finally he ravaged the Knights Templar monastic order, staging show trials and executing their leaders as heretics. In fact, he owed the Templars vast sums of money. Currency debasement was another tool he used to fund his government, with contemporary chroniclers suggesting that in some years half of the budget was financed through devaluing the currency. This led to violent social unrest and earned him another nickname for all eternity: the Philip the Forger.
Kings were well known for their debasement policies. Referring to Louis XIV of France, French Enlightenment philosopher Montesquieu wrote: “… the king is a great magician, for his dominion extends to the minds of his subjects; he makes them think what he wishes. If he has only a million crowns in his exchequer, and has need of two millions, he has only to persuade them that one crown is worth two, and they believe it. If he has a costly war on hand, and is short of money, he simply suggests to his subjects that a piece of paper is coin of the realm, and they are straightway convinced of it.”
Obviously, Germany's debasement of its silver commemorative coins is trivial compared with the giants of currency debasement throughout history. On the other hand, coinciding as it does with the US Federal Reserve's second round of quantitative easing, which creates another 600 billion US dollars out of thin air, it illustrates once again that one can never blindly trust a government to defend the value of its currency.
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