Wednesday, July 13, 2011

Unsound Roman money

The difficult task of explaining with exactness the utter demoralization of the currency at the moment when Diocletian ascended the throne cannot be here attempted. Only a few outstanding features can be delineated. The political importance of sound currency has never been more conspicuously, shown than in the century which followed on the death of Commodus (180 AD)...

Although the imperial coins underwent a certain amount of depreciation between the time of Augustus and that of the Severi, it was not such as to throw out of gear the taxation and the commerce of the Empire. But with Caracalla a rapid decline set in, and by the time of Aurelian the disorganization had gone so far that practically gold and silver were demonetized, and copper became the standard medium of exchange. The principal coin that professed to be silver had come to contain no more than five per cent of that metal, and this proportion sank afterwards to two per cent. What a government gains by making its payments in corrupted coin is always far more than lost in the revenue which it receives. The debasement of the coinage means a lightening of taxation, and it is never possible to enhance the nominal amount receivable by the exchequer so as to keep pace with the depreciation. - The Cambridge Medieval History Series, Volume I, pp. 39-40

Plus ca change... The series has been rewritten and reissued periodically, but my highly used copy is about one hundred years old, which is to say that it was written before the ascendancy of Keynesianism. Hence the historian recognizes, very clearly, that debasement does not work. This holds true whether the coins are being reforged with higher percentages of cheaper metal, or if the central bank issues more fiat currency: inflation is ruinous to economies.

No doubt Krugman would have had Diocletian debase his currency even more in order to stimulate the Roman economy and avoid a liquidity trap.

The lesson repeats through history. At some point, the government incurs various expenditures which cannot be funded through taxation, so it debases the currency to makes ends meet. Rather than impose austerity measures upon itself, it debases the currency further; if it persists, the currency becomes effectively worthless. Hence Diocletian began to accept taxes in the form of agricultural products, thereby unintentionally instituting the serf system.

There is no way of knowing if the Federal Reserve will proceed until hyperinflation sets in. I have very little faith in Bernanke's restraint, but the banksters who run our country will be reluctant to allow him to destroy the currency completely, so while inflation is a good bet in the near and medium term, unlike the decline of empires who follow late Roman monetary policy, hyperinflation is by no means inevitable.

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