The Roman Emperors of today

In the first of our features from The Real Asset Report, we bring you our look at Roman Currency debasement and how it compares to debasement today.

“The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost… people know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation.“  Ben Bernanke, 2002.

“This is the most serious financial crisis we’ve seen at least since the 1930s, if not ever,” Sir Mervyn King.

We have learnt many, many things from history all of which continue to benefit the human race every day. For instance in medicine and technology the leaps taken in our knowledge are huge. We can now treat illnesses which were once deadly and we can now communicate with people who once would have never known we ever existed.

But some discoveries in history we do not learn from. As Bernanke shows us, one of those things is money and government. History shows us that driving down the value of a currency, by printing and debasing, can only end in tears… and collapse.

At school we are taught about historical ‘ages’ and periods; the Bronze Age, the Middle Ages, the Roman Empire, the Ancient Egyptians, the Roaring Twenties and the Renaissance period. Today, we are purportedly living in the ‘Post-Modern’ age.

The thing about ages is that they come to an end. Ours will too, what brings it to an end remains to be seen. But drawing parallels with the Roman Empire we might be able to get a hint. Joseph Tainter describes the Roman Empire as ‘paradoxically one of the greatest successes and greatest failures of history.’ Sounds all too familiar to the age we live in now.

There are many academic studies that argue over what caused the Roman Empire to collapse – generally however it comes down to monetary, fiscal, political and military issues.

‘[These] issues are all so intertwined because any state normally seeks to monopolize the supply of money within its own territory. Monetary policy therefore serves, even if it serves badly, the perceived needs of the rulers of the state.’ Professor Joseph Peden, 1984[1].

In the current age, since 1971 we have seen monetary policy do exactly that. As Bernholz (2003)[2] explains – governments during peacetime have an inflationary bias. ‘There has never occurred a hyperinflation in history which was not caused by a huge budget deficit of the state’ – mainly caused by the borrowing of governments to fulfil election promises.

The US dollar index[3] began in 1973, two years after all connection to gold was lost and Bretton Woods came to an end.

Since then the debasement of the US dollar is clear for all to see. The denarius was originally introduced by Augustus at around 95% silver purity, but it was Nero who in 68AD began to debase it from 92% purity[4].

The Denarius debasement between Nero and Antoninus Pius bears the greatest similarity to the US dollar index. However this period of debasement, the US dollar debasement we see now – from Nixon to Obama’s second term, is over a mere 40 years.

The denarius debasement didn’t end there; successive Roman Emperors dragged out the currency debasement until the fourth century. If we look at the denarius debasement up until it was rarely used then we can see how long the Roman Emperors managed to prolong the painful debasement.

The Antoninianus was introduced by Caracalla in 215. It contained 80% of the silver of two denarii. The coin was demonetized by Elagabalus in 219 AD, but later Pupienus and Balbinus (238 AD) named the Antoninianus as the principal silver denomination. As the graph shows this was reduced to a mere pith of silver content.

In contrast to the denarii, the destruction of the antoninianus was a far more brutal process – falling from a silver purity 49.5% under Pupienus & Balbinus in 238 to mere 5% silver content by the time of Aurelian (274 AD).

Comparing the antoninianus to the US dollar index, as we did with the denarius earlier, we see the debasement of the US dollar is a far more extreme example of government abuse of monetary policy than the Emperors of Rome.

Why did this debasement begin?

For much the same reasons as we see money being created of thin air today. President Barack Obama, UK Prime Minister David Cameron and Japan Prime Minister Shinzo Abe have all been elected to run countries which are heading for insolvency. As we explained earlier, monetary policy is used to serve the state’s needs and to fulfil election promises. Newly elected governments are no better than their predecessors – as shown in the previous dollar index graphs and in that below.

In modern times the race to debase has been much quicker from government to government, currency to currency, than it ever was in Roman times. But that doesn’t mean reasons for doing so were any different.

‘Emperors upon accession were often faced with insolvent government, and rarely were able to accumulate reserves for emergencies. When extraordinary expenses arose the supply of coinage was frequently insufficient. To counter this problem, Nero began in 64 A.D. a policy that subsequent emperors found increasingly irresistible. He debased the silver denarius; raising the content of bases metal to ten per cent…this proved no solution.’ Joseph Tainter, 1990.

Our period of debasement has only been going on for forty-years or so, the Romans managed to carry on the charade for centuries. The lengths they went to do so do not sound dissimilar to those of our own governments.

“By debasing currency, increasing taxes and imposing stringent regulations on the lives of individuals, the Empire was, for a time able to survive. It did so however by vastly increasing its own costliness and in doing so decreased the marginal return it could offer its population. These costs drained the peasantry so thoroughly that population could not recover from outbreaks of plague, producing lands were abandoned and the ability of the state to support itself deteriorated.” Joseph Tainter, 1990.

The devaluation of the denarius accelerated into the third and fourth centuries. Dramatic inflation in both centuries is something which cannot be denied.

Today, the defence of many central bankers is that inflation has not been as dramatic as many predicted. However, inflation took time to kick during the 3^rd century – nearly 100 years after debasement began; around 238 AD; when the antoninianus was reintroduced.  ‘This debasement of 238 was unique because for the first time in Roman history it was done without defensible monetary policy.’  Wassink 1991 (cited, Bernholz, 2003)

According to Bernholz (2003) from 238 A.D inflation slowly accelerated ‘since first the good money was driven out of circulation, so that the total money supply rose only scarcely in the beginning’.

In modern times there is no good money to be driven out of circulation, and there is no defensible monetary policy. It is all bad. This suggests high inflation, whether ‘real’ or that recognised by the government, is not far around the corner.

Bernholz’s data shows inflation was 3.65% per annum on average between 250 – 293, it then rose to 22.28% from 293-301. Bernholz agrees that this is ‘impressive inflation given the metallic monetary regime, but is dwarfed in comparison with what is possible under a discretionary paper money regime.’

There are conflicting views as to whether it is confidence or debasement which causes inflation. Lendon (1990, cited Bernholz (2003) believes loss of confidence in a currency results in inflation:

So long as the coins circulated at a [nominal] value higher than that of the bullion they contained, their value rested upon public confidence, and there was always the danger or panic, whether set off by the death of the reigning emperor, retariffing the coins or any number of unrecoverable causes. Confidence once destroyed cannot readily be restored, and each blow to the coin’s esteem would add to the public suspicion, driving the value of the coins ever down, and the prices of commodities even higher.

However Bernholz (2003) believes an increase in price is principally down to the debasement of a currency, his research finds no evidence of pessimistic expectations, in a paper currency, causing inflationary episodes.

Whenever one is drawn into a discussion over a return to sound money, those for the motion are accused of dragging the economy back 100 years. In truth, the debasement we see today has its roots even further than the gold standard of the late 19^th and 20^th centuries – we can trace it back to Ancient Roman times. We live, by a long way, in the most developed of all ages, but so did the Romans and look where debasement left them.