A History of Inflation in Rome: Are We on a Similar Course?
Recently, the second chapter of Forty Centuries of Wages and Price Controls by Robert L. Schuetting and Eamonn Butler was released for a free read at the Mises Institute.
You may be wondering why I would post about ancient Rome on a day like today. Iran is boiling over. Dozens were killed by a suicide bomber in Iraq over the weekend. The stock market has turned downward and there seems to be no end to the bad news. Well, I suppose I am posting this for several reasons.
1. Governments rarely learn from history, as you are about to read. America - and just about every government - debases their currency for the same reason the Romans did: it concentrates power in the hands of government.
2. Inflation always follows currency debasement. It's mild at first, but then escalates out of control quickly. Furthermore, once it becomes "ok" to increase the money supply "just a little," it becomes harder to stop the government from doing it on a regular basis.
3. Almost all governments in modern times use the same methods to combat inflation that the Romans tried, they just have new names for these policies.
4. Although much is known about Roman military exploits and leadership, little is known about Roman economics.
5. If the rest of the book is as good as this chapter, it may be worthwhile to purchase.
I hope you enjoy the read. I'd love to hear comments about the similarities you see in Roman and American fiscal policy.
David in Qatar
Without further delay, here is Chapter Two:
Price Fixing in Ancient Rome
As might be expected, the Roman Republic was not to be spared a good many ventures into control of the economy by the government. One of the most famous of the Republican statutes was the Law of the Twelve Tables (449 B.C.) which, among other things, fixed the maximum rate of interest at one uncia per libra (approximately 8 percent), but it is not known whether this was for a month or for a year. At various times after this basic law was passed, however, politicians found it popular to generously forgive debtors their agreed-upon interest payments. A Licinian law of 367 B.C., for instance, declared that interest already paid could be deducted from the principal owed, in effect setting a maximum price of zero on interest. The lex Genucia (342 B.C.) had a similar provision and we are told that violations of this "maximum" were "severely repressed under the lex Marcia." Levy concludes that "Aside from the Law of the Twelve Tables, these ad hoc or demagogic measures soon went out of use."
The laws on grain were to have a more enduring effect on the history of Rome. From at least the time of the fourth century B.C., the Roman government bought supplies of corn or wheat in times of shortage and resold them to the people at a low fixed price. Under the tribune Caius Gracchus the Lex Sempronia Frumentaria was adopted, which allowed every Roman citizen the right to buy a certain amount of wheat at an official price much lower than the market price. In 58 B.C. this law was "improved" to allow every citizen free wheat. The result, of course, came as a surprise to the government. Most of the farmers remaining in the countryside simply left to live in Rome without working.
Slaves were freed by their masters so that they, as Roman citizens, could be supported by the state. In 45 B.C., Julius Caesar discovered that almost one citizen in three was receiving his wheat at government expense. He managed to reduce this number by about half, but it soon rose again; throughout the centuries of the empire, Rome was to be perpetually plagued with this problem of artificially low prices for grain, which caused economic dislocations of all sorts.
In order to attempt to deal with their increasing economic problems, the emperors gradually began to devalue the currency. Nero (A.D. 54–68) began with small devaluations and matters became worse under Marcus Aurelius (A.D. 161–180) when the weights of coins were reduced. "These manipulations were the probable cause of a rise in prices," according to Levy. The Emperor Commodus (A.D.180–192) turned once again to price controls and decreed a series of maximum prices, but matters only became worse and the rise in prices became "headlong" under the Emperor Caracalla (A.D. 211–217).
Egypt was the province of the empire most affected, but her experience was reflected in lesser degrees throughout the Roman world. During the fourth century, the value of the gold solidus changed from 4,000 to 180 million Egyptian drachmai. Levy again attributes the phenomenal rise in prices which followed to the large increase of the amount of money in circulation. The price of the same measure of wheat rose in Egypt from 6 drachmai in the first century to 200 in the third century; in A.D. 314, the price rose to 9,000 drachmai and to 78,000 in A.D. 334; shortly after the year A.D. 344 the price shot up to more than 2 million drachmai. As noted, other provinces went through a similar, if not quite as spectacular, inflation. Levy writes,
"In monetary affairs, ineffectual regulations were decreed to Combat Gresham's Law [bad money drives out good] and domestic speculation in the different kinds of money. It was forbidden to buy or sell coins: they had to be used for payment only. It was even forbidden to hoard them! It was forbidden to melt them down (to extract the small amount of silver alloyed with the bronze). The punishment for all these offenses was death. Controls were set up along roads and at ports, where the police searched traders and travelers. Of course, all these efforts were to no purpose." The Edict of Diocletian
The most famous and the most extensive attempt to control prices and wages occurred in the reign of the Emperor Diocletian who, to the considerable regret of his subjects, was not the most attentive student of Greek economic history. Since both the causes of the inflation that Diocletian attempted to control and the effects of his efforts are fairly well documented it is an episode worth considering in Some detail.
Shortly after his assumption of the throne in A.D. 284, "prices of commodities of all sorts and the wages of laborers reached unprecedented heights. " Historical records for determining the causes of this remarkable inflation are limited. One of the few surviving contemporary sources, the seventh chapter of the De Moribus Persecutorum, lays almost all the blame squarely at the feet of Diocletian. Since, however, the author is known to have been a Christian and since Diocletian, among other things, persecuted the Christians, we have to take this report cum grana salis. In this attack on the emperor we are told that most of the economic troubles of the empire were due to Diocletian's vast increase in the armed forces (there were several invasions by barbarian tribes during this period), to his huge building program (he rebuilt much of his chosen capital in Asia Minor, Nicomedia), to his consequent raising of taxes and the employment of more and more government officials and, finally, to his use of forced labor to accomplish much of his public-works program. Diocletian himself, in his edict (as we shall see) attributed the inflation entirely to the "avarice" of merchants and speculators.
A classical historian, Roland Kent, writing in the University of Pennsylvania Law Review, concludes from the available evidence that there were several major causes of the sharp rise in prices and wages. In the half century before Diocletian, there had been a succession of short-reigned, incompetent rulers elevated by the military; this era of weak government resulted in civil wars, riots, general uncertainty and, of course, economic instability. There certainly was a steep rise in taxes, some of it justifiable for the defense of the empire but some of it spent on grandiose public works of questionable value. As taxes rose, however, the tax base shrank and it became increasingly difficult to collect taxes, resulting in a vicious circle.
It would seem clear that the major single cause of the inflation was the drastic increase in the money supply owing to the devaluation or debasement of the coinage. In the late republic and early empire, the standard Roman coin was the silver denarius; the value of that coin had gradually been reduced until, in the years before Diocletian, emperors were issuing tin-plated copper coins that were still called by the name "denarius." Gresham's law, of course, became operative; silver and gold coins were naturally hoarded and were no longer found in circulation.
During the fifty-year interval ending with the rule of Claudius Victorinus in A.D. 268, the silver content of the Roman coin fell to one five-thousandth of its original level. With the monetary system in total disarray, the trade that had been hallmark of the empire was reduced to barter, and economic activity was stymied.
"The middle class was almost obliterated and the proletariat was quickly sinking to the level of serfdom. Intellectually the world had fallen into an apathy from which nothing would rouse it."
To this intellectual and moral morass came the Emperor Diocletian and he set about the task of reorganization with great vigor. Unfortunately, his zeal exceeded his understanding of the economic forces at work in the empire.
In an attempt to overcome the paralysis associated with centralized bureaucracy, he decentralized the administration of the empire and created three new centers of power under three "associate emperors." Since money was completely worthless, he devised a system of taxes based on payments in kind. This system had the effect, via the ascripti glebae, of totally destroying the freedom of the lower classes — they became serfs and were bound to the soil to ensure that the taxes would be forthcoming.
The "reforms" that are of most interest, however, are those relating to the currency and prices and wages. The currency reform came first and was followed, after it had become clear that this reform was a failure, by the edict on prices and wages. Diocletian had attempted to instill public confidence in the currency by putting a stop to the production of debased gold and silver coins.
According to Kent,
"Diocletian took the bull by the horns and issued a new denarius which was frankly of copper and made no pretense of being anything else; in doing this he established a new standard of value. The effect of this on prices needs no explanation; there was a readjustment upward, and very much upward."
The new coinage gave some stability to prices for a time, but unfortunately, the price level was still too high, in Diocletian's judgment, and he soon realized that he was faced with a new dilemma.
The principal reason for the official overvaluation of the currency, of course, was to provide the wherewithal to support the large army and massive bureaucracy — the equivalent of modern government. Diocletian's choices were to continue to mint the increasingly worthless denarius or to cut "government expenditures" and thereby reduce the requirement for minting them. In modern terminology, he could either continue to "inflate" or he could begin the process of "deflating" the economy.
Diocletian decided that deflation, reducing the costs of civil and military government, was impossible. On the other hand,
"To inflate would be equally disastrous in the long run. It was inflation that had brought the Empire to the verge of complete collapse. The reform of the currency had been aimed at checking the evil, and it was becoming painfully evident that it could not succeed in its task."
It was in this seemingly desperate circumstance that Diocletian determined to continue to inflate, but to do so in a way that would, he thought, prevent the inflation from occurring. He sought to do this by simultaneously fixing the prices of goods and services and suspending the freedom of people to decide what the official currency was worth. The famous edict of A.D. 301 was designed to accomplish this end. Its framers were very much aware of the fact that unless they could enforce a universal value for the denarius in terms of goods and services — a value that was wholly out of keeping with its actual value — the system that they had devised would collapse. Thus, the edict was all pervasive in its coverage and the penalties prescribed, severe.
The edict was duly proclaimed in A.D. 301 and, according to Kent, "the preamble is of some length, and is couched in language which is as difficult, obscure, and verbose as anything composed in Latin." Diocletian clearly was on the defensive in announcing such a sweeping law, which affected every person in the empire every day of the week; he uses considerable rhetoric to justify his actions, rhetoric that was used before him and which, with variations, has been used in most times and places since.
"He begins by listing his many titles and then goes on to announce that: The national honor and dignity and majesty of Rome demand that the fortune of our State … be also faithfully administered…. To be sure, if any spirit of self-restraint were holding in check those practices by which the raging and boundless avarice is inflamed … peradventure there would seem to be room left for shutting our eyes and holding our peace, since the united endurance of men's minds would ameliorate this detestable enormity and pitiable condition [but since it is unlikely that this greed will restrain itself] … it suits us, who are the watchful parents of the whole human race, [the term "parents" refers to his associate Augustus and two Caesars] that justice step in as an arbiter in the case, in order that the long-hoped-for result, which humanity could not achieve by itself, may by the remedies which our forethought suggests, be contributed toward the general alleviation of all."
In The Common People of Ancient Rome, Frank Abbot summarizes the essence of the edict in the following words:
"In his effort to bring prices down to what he considered a normal level, Diocletian did not content himself with half measures as we are trying in our attempts to suppress combinations in restraint of trade, but he boldly fixed the maximum prices at which beef, grain, eggs, clothing and other articles could be sold [and also the wages that all sorts of workers could receive] and prescribed the penalty of death for anyone who disposed of his wares at a higher figure." 
To be continued in the comments...