... AND DENARII FOOLISH
This mistake is one made over and over by great nations and empires. It is hoped that our current leaders have learned from history. The mistake here is using inflation to pay the bills. Now, before the use of paper money, which was introduced hundreds of years ago by Muslim rulers to great success, all money was in coins. Today when we work with coins, the pureness is guaranteed and enforced, but it is easy to forget that this was not always the case. This is a mistake that history has seen time and time again. Perhaps the temptation is just too great. Recently Zimbabwe printed itself into a situation in which there were days when the value of its currency would halve every hour. The Weimar Republic, in post-World War I Germany, created hyperinflation by just printing all the money they needed and hence decreasing the deutschemark until it was effectively valueless. Weimar’s government was voted out of office, and the Nazis were voted in on the promise to fix the economy. We all paid a high price for that inflationary spiral. The caliphs made this same error, and it crippled Islam, ending its most vibrant and expansive period. But if you go even further back, you will find that this mistake was yet another factor that brought down both the original and later the Eastern Roman empires.
The original economic strength of Rome was built on land. As the empire conquered more countries, more land was available to produce more goods, and the economy grew in proportion. Adding to the empire’s coffers was the sale by the state of captured soldiers or even families from newly conquered areas as slaves. Then the empire stopped expanding, and most of the land was already owned by the major families. With no more slaves or land to sell or grant, the wealth of the government had to come from taxes. Initially, being able to tax the rich families suited most emperors well. Those rich and influential noble families were the only real counterbalance to his power as emperor. So being able to tax them into poverty reinforced his own position by eliminating any competition. It was not too subtle economic warfare. And, of course, as always, the poorer classes much preferred the rich and noble families carry all of the tax burden.
But by the time of Emperor Nero, the well was running dry. The rich weren’t very rich anymore, and without them to create new income, by hiring the workers and buying from artisans, the entire Roman economy was slowing down. So to raise the money needed for the army and his court, Nero had to start taxing the poor and middle classes. This action slowed the economy even more, and it did not make the leader very popular with the masses, and that was even before the fire.
Nero, though, had grand plans for rebuilding the city of Rome in marble and erecting a palace for himself that would embarrass a modern Dubai emir. But with tax income down, there just weren’t enough coins—or silver to make new coins—to pay for all of his plans. Nero’s solution was to mint silver coins that weren’t all silver. This practice is called “debasing the currency.” This policy caused some inflation and unrest during his reign. Soon the older, undebased coins were being treated as more valuable, and they were. Nero’s debasing of the Roman currency set a precedent that many future emperors were happy to follow. By the reign of Claudius II Gothicus in 268 CE, the actual silver content of a “silver” denarius was less than 1 percent. There was not enough silver in a Roman silver coin to mine it if it had been ore. In value, the debased coins were the same as that of paper money today. They were a promise and symbol of wealth, but they had no intrinsic value. And the emperor found himself in a never-ending loop. With the coins worth less, the emperor needed more to pay for his army and bureaucrats. But if he minted more debased coins, the value of each coin was less. So he had to create even more coins with even less silver, and so it goes. The ever-creative Romans had managed to find a way to have both useless coins and runaway inflation.
The long-term effect on Rome of three centuries of gradual, and occasionally not so gradual, inflation was that the empire could afford to support fewer soldiers who were less well trained. It meant that governors had to press their provinces even harder to produce ever-increasing demands for more of ever-less-valuable coins to fill their treasury. The collapses of the Western Roman empire and, a thousand years later, of the Eastern or Byzantine Roman empire were not caused directly by debased coinage, but the practice certainly contributed.
It would be nice to think that knowing all of this might mean that modern governments would not make the same mistakes. Here is some food for thought: Seventy years ago the U.S. dollar was first devalued when the Federal Reserve Bank decided to raise the cost of an ounce of gold from $20.67 to $35 per ounce. Then thirty-five years ago, the value of gold or silver was totally detached from the U.S. dollar. That was called “going off the gold,” and later the United States went off the silver standard. It was then that the bills marked as silver certificates were withdrawn from circulation. That was because technically they could be turned in at a Federal Reserve Bank for silver coins or bars. Since then, nothing has actually supported the U.S. dollar, or most other currencies, beyond the faith and promise of each government.
Just like the Roman denarius, the gradual debasing of the value of the U.S. dollar has continued without slowing. With inflation and the growing price of gold, the dollar can buy only 10 percent as much gold as it could have in 1971. That means in terms of hard exchange, the United States has debased its currency 90 percent in the last forty years. With the deficit increasing, the spiral of inflation threatens. It seems we may have learned the wrong lesson from Nero.