(Mike Maharrey, Money Metals News Service) Iran has found a solution to its inflation problem. Just lop some zeros off the currency.

A parliamentary economics committee recently approved a bill to re-denominate the rial. The new currency would retain the name, but one new rial would equal 10,000 old rials.

Imagine if the U.S. government chopped a couple of zeros off a $100 bill, turning it into a $1 bill.

It’s like that.

According to Iranian officials, the move would “simplify financial calculations” and lower the cost of printing currency.

Of course, this won’t change anything for the Iranian people, other than to make the math a little easier. As an Iranian economist told the Financial Times, the scheme “is neither an effective monetary policy nor a mechanism to control inflation. It is simply a formal adjustment to the currency unit for accounting purposes.”

But it will make government people feel better because it might create the illusion of a stable currency – at least for a minute.

The rial has lost significant value in the wake of aggressive international sanctions and the government’s decision to inflate to keep the economy limping along. The annual inflation rate is running between 30 and 40 percent.

The Iranian government finances its massive deficits by borrowing money from the country’s central bank. When the bank funds these loans, it uses money created out of thin air. The U.S. central bank employs a similar (albeit less direct) scheme to fund federal government deficits. Through quantitative easing programs (QE), the Fed buys U.S. debt on the open market with money created out of thin air. While less direct than loans to the government, the process has the same inflationary effect.

Iran isn’t the first country to revalue its currency. Israel, Turkey, Romania, and Zambia have all lopped zeros off their currencies in recent years.

Good Old Monetary Debasement

How did Iran get to the point that it needs to “revalue” its currency? It’s a story that is almost as old as money itself. The government devalued the currency for its own purposes. It’s good old monetary debasement, and it’s been going on for thousands of years.

When you or I run out of money, we’ve got to figure out a way to earn more or do without some stuff. But when governments run low on cash, they can create more money and pay for whatever they want.

When money was primarily in the form of gold and silver coins, this monetary debasement took the form of coin clipping. Governments would remove small amounts of metal from each coin and then use it to make new coins. Each coin retained the same face value, but it got lighter over time.

Governments would also lower the purity of their coins, gradually adding other common metals to minimize gold and silver content.

When paper currency began to circulate, debasement became easier. The government could just arbitrarily revalue the currency’s relationship to gold. For instance, if an ounce of gold was valued at $30, the government could bump that up to $40 an ounce, enabling the government to issue more paper.

Today, debasement is even easier. The government doesn’t even need paper or a printing press. It can create new money with a few clicks of a mouse.

It’s easy to look at Iran with a critical eye and call them big dummies for lopping zeros off their money. However, the U.S. has pulled similar shenanigans. The federal government was just a little more sophisticated in its approach.

In 1933, President Franklin D. Roosevelt revalued the country’s gold.

Under the classical gold standard, the dollar was fixed at $20.67 per ounce of gold. This limited the government’s ability to expand the money supply. In 1933, Roosevelt issued Executive Order 6102, requiring Americans to turn their gold over to the government. In effect, this increased the country’s gold reserves, allowing the printing of more money.

But it wasn’t enough.

In 1934, the government raised the official price of gold from $20.67 per ounce to $35 per ounce. In effect, this was a 40 percent devaluation of the dollar in gold terms. This allowed Roosevelt and Friends to massively expand the dollar supply without running afoul of the gold-baking requirements.

In 1965, President Lyndon B. Johnson signed the Coinage Act, removing all the silver from dimes, quarters, and half-dollars. Instead, the government mints coins from “composites, with faces of the same alloy used in our 5-cent piece that is bonded to a core of pure copper.”

Today, you will sometimes hear coins minted before 1965 referred to as “junk silver.”

In reality, we should call modern American coins junk.

When Johnson signed the Coinage Act, he insisted that removing silver would have no impact on the value of U.S. coinage.

“[The] Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin,” he said.

Just a few years later, President Richard Nixon closed the “gold window,” severing the last connection between the dollar and gold. This gave the government free rein to create money without restraint.

Nixon made a claim similar to Johnson’s, asserting, “Let me lay to rest the bugaboo of what is called devaluation,” and promised, “Your dollar will be worth just as much as it is today.”

Psych.

The sad reality is that governments will continue to debase your money because money creation is the lifeblood of big government. And governments will always look for ways to pull the wool over your eyes and make you forget that your purchasing power is declining by the day.

Don’t be fooled.

Hold real money – gold and silver. The government can print it or inflate it away.

Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.