If I understand correctly, before the introduction in Europe of banknotes, bonds and similar, the value of money was entirely based on the worth of the precious metals inside. Barring a drop in the value of gold, how could a ruler decide to debase their money? Did they just declare that from now on, the new coins would contain less gold than before? If so, why didn't people who had a lor of the old coins just melt them for value and resold the metal?
Also, relatedly, what made certain currencies more sought after than other? Was it only the trust placed in the authority minting them that they wouldn't cheat on the metal composition?
In an economy in which currency consisted of coins made of precious metals, debasing the currency took the form of replacing some of the precious metal in each coin with metal that was less valuable. Over time, this would backfire, and people would respond to this trick by raising prices, thereby creating inflation. However, in the short term, the debasing of currency allowed some rulers to overcome their "temporary cash flow problems."
Imagine a ruler who wants to spend 1,000 silver dollars, but only has 900 silver dollars in his treasury. He sends his 900 silver dollars to the mint, where they are melted down to provide the silver needed to make 1,000 new silver dollars, each of which has 90% of the silver content of the old silver dollars.
The first time the ruler does this, he probably gets away with it. This is particularly true if he is paying old debts rather than trying to buy something new.
The people paid by the ruler, however, are more likely to spend the new dollars than any old dollars that they have on hand. This is because they are afraid that word of the debasement will get around, and that other people will refuse to accept the new dollars, or only accept them at a discount. ("This will cost you nine old dollars or ten new dollars.")
If the ruler requires that people accept the new dollars at parity with the old, people will still prefer to spend the new dollars rather than the old dollars. Indeed, if they can, they will keep the old dollars in reserve for a rainy day, and, perhaps even bury them in the backyard. Thus, the old dollars will tend to fall out of circulation. This is the phenomenon described in Gresham's Law, which states that "bad money drives out good."
Rulers who earned a reputation for maintaining the precious-metal content of their coins found that people, whether their own subjects or foreigners, preferred their coins to less reliable currencies. Thus, such rulers were able to pay less - in terms of nominal values - for goods and services than rulers who were less reliable. In other words, a ruler's reputation for reliability added to the value of the coins that he minted.