“With so many examples, one would think that the historical lessons of spending a nation’s wealth and debasing the currency through inflation (or deflation) would be clear. Evidently not.”
History buffs have long used the collapse of the Roman Empire as the standard when discussing how civilizations collapse from within.
Of course, that history translates well in the modern era. The same blundering stupidity, greed, graft, gangsterism, depravity, and lawlessness that drove the “ruling class” of politicians, bureaucrats, and the nearly 100 Emperors of Rome are alive and well in our time. Perhaps more so.
The wheel of history is nothing if not round.
The limping 500-year-old Roman Republic and its participatory Senate expired with the assassination of then-dictator for life, Julius Caesar, followed by Octavian, the first Emperor whom the Senate named the “revered one,” or Augustus, in 27 BC. By the early first century AD, the Pax Romana had spread over 1.5 million miles with a population of over 65 million – or more, depending on who one consults. Regardless, the Empire spanned a quarter of the known world, from Mesopotamia in the East, the Rhine River bordering Germania to Egypt, and England and Scotland to Morocco.
By 476 AD, a Germanic prince, Odoacer, deposed the last Roman Emperor. The Western Empire was no more.
Historians have offered dozens of reasons describing the fall of Rome, including the growth of Christianity and the extensive use of lead, among others. They all may be valid to an extent, but two specific reasons seem glaringly obvious and make the other explanations dependent.
The Empire drove itself into the ground by hyperinflation caused by the debasement of the currency and the trailing insolvency, married to the massive influx of various barbarian, Germanic, Hun, Goth, Vandal, and Visigoth peoples and roving tribes of bandits that finally crushed the identity of being a “Roman” into the dust of history.
Devaluing the currency was directly responsible for economic chaos and inflation, and the consequences rippled throughout the Empire. Rome’s enormous wealth and power were built on its trade throughout the far-flung territories and protected by the Imperial Roman Army. (All of this was made possible by its military highways, all interconnected with hundreds of excellent roads – some still in use – connecting well over a hundred Roman provinces with some 250,000 miles of road.)
But that wealth was steadily consumed by the devaluation of its currency. The coin that was once esteemed in the Empire as a symbol of its power, became a literal joke among Romans for its valuelessness.
The denarius, a silver coin worth approximately a day’s wage when first introduced around 200 BC, was initially minted with 4.5 grams of silver, or nearly 95% silver content. Still, its circulation as currency was constrained by the amount of silver available. Over the years and centuries, Rome drastically reduced the silver content, replacing it with copper and a thin coating of silver – so that the government could mint an ever-increasing quantity of coins to cover its ever-expanding spending. The collapsing value of the common currency caused a long slide in public confidence as prices increased to adjust to the real, depressed value, and trade contracted. The economic chaos encouraged black markets, fraud, and bartering. In 265 AD, the denarius was only 5% silver, and some economists estimate prices had increased upwards of 1000%, possibly far more. Even drastic tax increases failed to help, as they simply stopped growth.
At the end of the Empire, the coin only had .02 percent silver. Other currencies were issued that attempted to strangle the runaway inflation, but the Empire’s wealth was already spent. The constant devaluation of currency devastated every Roman, especially the Roman Legions. The coin that could originally pay an average day’s wage slipped to virtual worthlessness and became the visual symbol of defeat.
On the Empire’s frontiers, the Legions fought skirmishes and all-out assaults on numerous people groups crossing into Roman territory. But in time, some of the same groups were invited to settle in parts of the Eastern and Northern frontiers to secure the Roman borders and augment the increasingly expensive and dwindling Roman military presence. Eventually, most of Rome’s guests on the frontiers turned on the host. In addition, Roman citizens themselves steadily moved from Rome and Italy into the provinces, where they became less Roman and less reliant on Roman protection.
Finally, the Imperial Roman Army, a far weaker, smaller, and demoralized army, could not keep the Visigoths from sacking Rome in 410 AD, and the end of the Empire was closing fast. Over the next five decades, it was besieged by wars and fending off alliances and invaders while forestalling the inevitable.
Rome was hardly the first time a city, province, or nation encountered massive economic chaos caused by what we now know as inflation. History is replete with examples.
The ancient Hebrews in the Old Testament understood the consequences of inflation. A siege and limited goods caused “a donkey’s head [to be sold] for eighty pieces of silver” in 2 Kings 6:2. Nehemiah drove up the regional prices of materials and wood by buying so much of the available material for rebuilding the wall in Jerusalem. “Dishonest measures” used to weigh grain or produce would ruin the value of both, warned the Proverbs.
The Mali Empire’s King Musa in 1324 stopped in Cairo on his way to Mecca (with tens of thousands of soldiers, slaves, and servants) and gave out so much gold that a commentator wrote that the price of gold plummeted in value “for a decade.”
In the 1500s, so much gold from the New World was sent to Spain – while its domestic production of goods and services remained the same – that prices jumped over 400% by some estimates.
In US history, the founders (students of the past to be sure) often warned about fiat money and the establishment of centralized control. In the first century of the nation barter, private bank notes, promissory notes, and small currency minted by the government were the primary means of commerce. In 1837 the nation went on a gold standard setting the value of a US dollar at $20.33 per troy once, which promised stability and caution in public affairs. .
The Civil War forced the North and South to borrow money and print fiat money to finance the war. In the North, with a far more developed financial system, the printing of paper money drove inflation to over 75%. The South, with a far smaller financial system and borrowing base, was forced to print three to four times the amount of fiat money than the North, and prices jumped to 600%-700% percent during the war. (After the war, Southern bonds and currency were worthless, of course, and the loss of wealth impoverished the South for generations.)
With so many examples, one would think that the historical lessons of spending a nation’s wealth and debasing the currency through inflation (or deflation) would be clear. Evidently not.
After the Civil War, gold became once again the standard for bankers. However, cyclical businesses like farming and manufacturing needed access to debt and less expensive money. Congress then began buying silver to supplement the need and expand the money supply with both good and bad results because of the available silver. The twentieth century was beset with bouts of both inflation and deflation, but after WWII, the massive creation of wealth through manufacturing and agriculture, and the demand for labor kept inflation modest. It was in the shadow of LBJ’s Vietnam War and the Great Society that massive increases in monetary expansion took place. In just three years the national budget grew by a third.
By 1974, any discretionary control on spending by the President as head of the Executive branch was removed by Congress when they eliminated the power of the President to impound appropriated funds. In less than a decade federal deficits increased five-fold.
With Congress firmly in control, spending and debt have continued to rapidly escalate, regardless of party. Today the nation has $33 Trillion in debt with a yearly production of goods and services of $17 Trillion.
Since the inception of the Federal Reserve System in 1913 the US dollar has fallen by a staggering 97% – worth 3% of its former value. Translated another way, if you could purchase something in 1913 for $1, that same item today would cost $31.01. The accumulated inflation is 3001.03%!
Meet our denarius.
Many economists would and will point out that the standard of living is far greater and better now than in 1913, which is certainly the case. They will note that there is far more wealth spread out to far more people than ever before. That is true as well. But the same thing can be said of a hard-working family that builds a comfortable life from their earnings. Then they borrow off credit cards for years to “improve” their lives even more, and find themselves upside down, not making enough income to pay off the debt incurred. They have depleted their net worth – or wealth. Their options become bankruptcy and its consequences, selling off assets or borrowing yet more money if possible, or producing new wealth by providing a good or service that someone else needs. It’s not difficult to grasp.
Our ruling class has decided to follow Rome’s example. In merely three years we have blown out federal spending by 20%, and Congress is poised to continue annual trillion deficits in federal spending until – forever?
The lesson of history is that you cannot consume your wealth without replacing your wealth. There is no arbitrary reckoning that can defy the law of mathematics and economics – or human nature.