Great Debasement

The Great Debasement is the name historians give to the period from 1544 to 1551 when the English Crown deliberately reduced the gold and silver content of its coins while keeping their face values unchanged. Started under Henry VIII and continued in the reign of his son Edward VI, it turned the Royal Mint into a revenue machine: the Crown bought precious metal, stretched it with copper, and spent the surplus coins on war.

The episode is the best-known English case of currency debasement, the general practice of cutting the metal in coins below their stated value. It differs from that general term in being a single, dated policy with a clear beginning and end. It is also the classic illustration of Gresham's law, the observation that when good and bad coins share the same face value, people spend the bad and hoard or export the good.

Picture a bakery that sells a loaf for the same price as always but quietly swaps half the flour for sawdust. For a while customers keep paying, because the wrapper looks the same. The baker pockets the difference. Then people start cutting the loaves open, notice the trick, and either demand more loaves for their money or go elsewhere.

That is roughly what happened to English silver coins in the 1540s. A shilling still said "shilling", but there was far less silver inside it. The king gained in the short run because each pound of silver could be turned into many more coins. Ordinary people and foreign merchants soon noticed, prices rose, and the older, purer coins disappeared from circulation as people kept them back.

Henry VIII ordered the first reduction in fineness by a secret indenture in 1542, and the debased pieces began to be released into circulation in 1544. His wars with France and Scotland, and the cost of his court, had outrun the money raised by taxes and by the sale of monastic lands. Debasement offered revenue without asking Parliament.

Sterling silver had been 92.5% pure. Under the debasement the standard was cut to 50% by 1545, to about 33% by 1547 and to 25% in 1551. Gold coins were also reduced, from 23 carats to 22 and then 20. After Henry died in 1547 the policy continued under Edward VI's regent, the Duke of Somerset. It was reversed in 1551, when the government led by the Duke of Northumberland returned new silver coins to the 92.5% standard, although the base coins already in circulation remained in use.

The thin silver surface on Henry's later shillings, known as testoons, wore off quickly on the raised parts of the design. The king's nose turned copper-coloured first, which earned him the nickname "Old Coppernose".

The Crown's gain came from seigniorage, the difference between what a coin is worth in trade and what it costs to produce. Per coin it can be written as:

• $S$ is the seigniorage, or profit, on one coin.
• $F$ is the face value of the coin.
• $w$ is the weight of the coin.
• $f$ is the fineness, the share of the weight that is pure silver.
• $p$ is the price of pure silver per unit of weight.
• $c$ is the cost of minting one coin.

As a simplified illustration with round numbers, take a coin of face value 12 pence weighing 0.2 ounces, pure silver at 60 pence an ounce and a minting cost of 0.5 pence. At sterling fineness, $f = 0.925$, the silver inside is worth $0.2 \times 0.925 \times 60 = 11.1$ pence, so the profit is $12 - 11.1 - 0.5 = 0.4$ pence. At $f = 0.25$, the silver is worth only $0.2 \times 0.25 \times 60 = 3$ pence and the profit jumps to $12 - 3 - 0.5 = 8.5$ pence. The historian C. E. Challis estimated the Crown's total profit from the Great Debasement at about £1.27 million, a very large sum for the period.

The coin supply grew quickly, and prices rose sharply through the 1540s, although historians still debate how much of that inflation came from debasement rather than poor harvests and population growth. Wages lagged behind prices, which hurt labourers and anyone on a fixed income.

• Foreign exchange. Merchants in Antwerp, then the main market for English cloth, valued coins by their metal, and the exchange rate of sterling fell as the silver content dropped.
• Hoarding and melting. Older, finer coins such as the English penny of earlier reigns were kept back or melted, so the bad coin did most of the circulating.
• Trust. Confidence in the king's coin, and in the idea that a coin's face value meant something, was badly shaken.

The base coins were finally withdrawn under Elizabeth I, who in 1560 to 1561 called in the debased money and reissued coins at the old standard, with Sir Thomas Gresham and William Cecil among her advisers. That operation is described under recoinage. The silver standard set then lasted, in principle, for well over a century.

The Great Debasement is often compared with the falling silver content of the Roman denarius and with modern governments that cover deficits by monetary financing. The comparison holds because all three let the issuer spend money it had not raised by tax, at the cost of the store-of-value role of its currency. The name "Gresham's law" was itself applied much later, by the economist Henry Dunning Macleod in 1858, partly in reference to this period.

• Royal Mint Museum
• Faisal Khan: Gresham's Law Explained