There’s nothing especially new about inflation, nor should anyone up on their history be surprised to learn of its devastating consequences. Rulers need armies to rule and funds to pay for their troops’ obedience and loyalty. Inflation is a convenient means of getting those funds. The Roman Empire provides a cautionary tale.
From the time of Augustus to that of Diocletian the number of Roman troops more than doubled. Over these years the denarius was so thoroughly debased by a succession of rulers that, by the time of Diocletian, it had been reduced to a silverless, copper plated coin. By A.D. 268 it had fallen to one five-thousandth of its original value. Trade increasingly collapsed into barter and the middle class was nearly wiped out.
Not a fool, Diocletian fully appreciated the costs of this centuries long currency debasement and responded by declaring that taxes were no longer to be paid in coin, but in goods. What he of course never did was return the denarius to a money worth its weight in silver. Rather, he presumed to fix the effects rather than the cause. To this end he imposed a wide range of price, wage, production and anti-hoarding rules.
The most notorious and draconian of these measures was the famous A.D. 301 Edict. It decreed the death penalty for those who broke the law. Despite the resulting bloodshed, Rome’s economic inflation-driven economic collapse continued. Inflation continued to run a muck. For example, in his A.D. 301 Edict, Diocletian set gold prices at 50,000 denarii per pound. However, by 337, the year of Constantine’s death, a pound of gold was worth 20,000,000 denarii!
What is generally considered the final century of the Roman Empire (at least the Western Empire) was characterized by economic decay and social deterioration. Roman’s abandoned the market economy in droves. Being forced by law to treat a coin as having a value which it simply did not made rational economic activity almost impossible – without breaking the law. Some fled the country. Others entered voluntary serfdom – escaping the cash economy. The feudal system of Europe is frequently explained as a consequence of the collapse of a sophisticated economy after the fall of Roman civilization. In fact, though, feudalism emerged in the very bosom of Rome. It was the rational response to a monetary economy crippled by a coercively mandated currency verging on worthless.
Certainly, explanatory efforts to pinpoint any single cause for an event as epic as the fall of Rome would be too simplistic. There can be no doubt, however, those centuries of economic deterioration played an important role. Indeed, the common practice of portraying the barbarian invasions as a conquest is a bit misleading. For the majority of the Roman lower class – a category into which much of the middle class had fallen – the sackers of Rome were not conquers, but liberators: liberation from the denarius.
The lessons for today are all evident in that story. A good generated out of the market for common benefit is corrupted by power and coercion . Authorities, with the coercive ability to do so, turn the currency unit from a market valued commodity into an administratively decreed exchange module. A coin is required by law (by fiat) to be treated as being worth, say, what the market values as an ounce of gold, regardless of the fact that there is not – even absurdly less than – that much gold in the coin.
The first result is rising prices as producers and merchants try to compensate for the lesser value of the money they’re forced to accept at make-believe rates. If the rulers with the weapons of coercion follow with price controls, then the quality and quantity are diminished – often surreptitiously.
Wage, price, quota, etc., regulations all too often are subsequently imposed through coercion, attempting to suppress such natural market adjustments. The Roman example though provides a good predictor of what follows. Black markets spread and people merely trying to improve the quality of life of their families, through voluntary exchange, must abandon the monetary economy in all kinds of ways.
In the good old days, though, when money was in the currency of coinage the creation of fiat currency involved elaborate and labor intensive efforts: e.g., re-minting coins with reduced precious metal content. Those days are gone, though. Once we arrive at the age of computerized money, when the Federal Reserve, and other such central banks, simply declare what the money supply is, inflation is too easy and tempting not to massively abuse the fiat and plunder the people.
All through this discussion, though, we must not lose sight of the fact that money is just a commodity, no less subject to forces of supply-and-demand as any other commodity. Increases in the supply lower per-unit demand, causing price to fall. And that falling price is the collapsing purchasing power of our money.
If you imagine that carrying your dollars in your wallet, or even locking them in your home wall safe, secures them from theft, think again. Inflation is the most insidious theft of all. Every time that the central bank inflates the money supply your dollars shrink – wherever you’re storing them. Once more of them are circulating, each one is worth less. Consequently, merchants need more of them to pay their business expenses and so on down the line of their suppliers.
Naturally, the rulers blame the rising prices on greedy bakers, bankers, merchants, businessmen, capitalists, corporations, Jews, whoever happens to be the popular whipping boy of the times. All this conveniently obscures the fact that the prices started rising in attempts to re-establish the market value of the money, which was destroyed by the ruler’s inflation.
And so it goes. Present-day fiat currency driven monetary policy in both the United States and Europe reveal that little has changed since the collapse of Rome. It’s not so much, I suspect, though, that the lessons haven’t been learned. It’s just that, when you control all the guns, it’s so easy to control the money, and who isn’t susceptible to the vanity that a monetary policy that serves their interest is in the interest of the so-called greater good?
The human inclination toward vanity and self-serving delusion wouldn’t seem to be facing extinction any time soon. One wonders if submission to being bossed around and impoverished by maniacal rulers might, though, some day.
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