Since we talked about monetary history last time, I thought this would be a good time to include these fascinating posts from last year by Izabella Kaminsaka about finance in the Roman Empire. They debunk one of the most cherished libertarian beliefs- that the fall of Rome was caused by Diocletian's debasement of the currency. In reality, this was an symptom, not a cause, of an empire in the throes of decay. It could no longer expand, was wracked by migration, climate change, epidemic disease, extreme inequality, corruption, military overextension, and civil wars (sound familiar?). Simplistic explanations, especially ones that feed into a certain political agenda, are not to be taken seriously. Not that our current "default" is being driven by dysfunctional politics, not "money printing" per se.
I normally don't like to include entire posts, but this is too interesting, and I wanted to spare you the gateway on the FT site (all emphasis mine):
It’s Christmas. A time of year intrinsically linked to baby Jesus, a manger, some ancient wise men, choirs of angels and what is mostly an unflattering representation of the Roman Empire.
Roman PR has been faltering on other fronts as well, as this segment demonstrates…
The theory being pushed, of course, is that Rome’s debasement of the silver currency was somehow responsible for ultimate destruction of the Empire — making all this a highly relevant and cautionary lesson for today’s times. The moral of the story is perhaps best stated as: don’t do QE because the US Empire will be destroyed too. Or some such.
This also happens to be one of Ron Paul’s favourite fallbacks when it comes to justifying his rubbishing of the Fed and Ben Bernanke.
The theory featured prominently in a spat between Ron Paul and Paul Krugman in April this year, in which Ron Paul argued that QE would eventually lead the US to the same fate as the Roman Empire. Unfortunately, even Krugman failed to defend the Romans on the matter. In fact, he replied that he was not a defender of the economic policies of the Roman Emperor, Diocletian.
Which is a shame, because Diocletian really wasn’t as bad as many people make out, historically speaking.
Since it’s Christmas, a time of year when everyone deserves a proper hearing — and since I’ve always had a special place in my heart for the Romans, having been a student of Ancient History — I figured it might be useful to explain why a) Diocletian is misunderstood by modern economists and politicians, and b) why Rome did not fall because it debased its currency.*
First off, the Roman hyperinflation period — constantly referred to by debasement obsessives — post-dates actual debasement by about 60 years. Using it as a justification for the hyperinflation is like suggesting that a hypothetical debasement in the 1950s could in some way be responsible for today’s economic woes.
Secondly, the Roman debasement was not a one off affair. History tells us that the Romans were “debasing” their currency successfully for many decades with no hyperinflationary consequences. What changed ahead of the hyperinflation period of the third century, however, was that the Empire’s political stability was being threatened.
It’s as Dr. Benet Salway at UCL explained to us by email (our emphasis):
In the case of the third century crisis it is arguable that the political instability preceded the monetary, in that debasement was used to make a finite amount of silver stretch further when pay rises and one-off payments were used to reward troops for support to a new claimant to the throne. There was a considerable timelag between debasement (starting with vengeance c. 200) and hyperinflation (which really did not kick in until the 260s). It is also notable that, despite re-establishing political stability Diocletian’s price control measures and currency revaluation both failed to curb inflation. It was only with Constantine’s shift away from debased and discredited silver coinage to the new gold solidus as the basis of the state’s monetary economy that inflation was brought under control. Ironically the success of the solidus as a stable coinage long outlasted the political existence of the empire in the west. The western empire’s collapse in the fifth century was not accompanied by financial meltdown. So, even in the Roman case the correlation between political and monetary stability is complex and varied.
As to what really caused the fall of Rome, we love the view presented by W.V. Harris at Columbia University.
In his paper “A revisionist view of Roman money” — in which he compellingly argues that Rome had a much more developed credit system than most people appreciate — he highlights amongst other things the following point:
The purpose of this article has not been to demonstrate that per capita growth occurred in the late Republic or under the Principate (though such growth probably did occur in the second of these periods), but rather that shortage of money was not to any important extent a brake on growth. What impeded sustained economic growth in Roman antiquity was not a shortage of money, but mainly the failure to adopt technologies, especially a fuel technology, that would have allowed the Romans to escape from the Malthusian impasse.
And as he explained further to us by telephone:
The things that prevented the Romans from having a takeoff are basically two: One is lack of technological innovation. Lack of diffusion of productive technology and the other was not using fossil fuels. They didn’t, whereas England started having its industrial revolution (a much-debated question, as you know), in large part because of coal.
The other point worth stressing is that Rome’s credit system really was awash with private credit transactions (and debts). People like to focus on the coinage, but actually — if you follow Harris’ research — the primary mode of exchange for high value transactions, such as property, was credit. And that goes back to the days of the Republic. Coinage, meanwhile, was much more commonly associated with smaller daily purchases. When it comes to large gold payments, meanwhile, these were mostly dedicated to the settlement of international transactions. That is, for transacting with entities outside of the Roman credit system, and with people whose credit profiles were unfamiliar or not trusted by the Romans.
But there are other problems with the comparison too. As Harris explained:Defending the Romans (FT Alphaville)
“The problem with the analogy is that the structure of state finance was totally different, and the Roman Empire didn’t have public debt [to start with], and the whole idea of state borrowing was foreign. As far as the quantity of private debt is concerned, that was seldom a problem that affected the Roman state. What eventually did afflict the Roman state very seriously, as Republicans would no doubt hate to hear, was that it failed to tax the rich sufficiently.
Indeed, you could say that when debasement happened it was partly a type of stealth taxation affecting those who transacted in coinage primarily. This was fine, of course, until the 270s AD when Gresham’s law started to kick in — a.k.a. the hoarding of superior coins and claims — the first time Romans really found themselves assigning a privileged status to old coins over new ones.
What Harris seems to be saying thus is that when it comes to debasement and inflation, the context is all important:
The debasement didn’t do any harm on its own, or rather it would not have done so if all of the coinage in circulation had been purely fiduciary (as is the case with us). In the 270s (perhaps slightly earlier) people began to lose trust in the value of the heavily debased silver coinage, and that led to a serious inflation crisis. [the Roman empire ran into lots of problems in the empire and in the 3rd century]. From a currency point of view, however, the Roman Empire recovered… the Romans moved from a silver based coinage to a gold based coinage and that worked reasonably well for centuries. The fourth-century empire had fiscal problems but they were not caused by its coinage system.
Indeed, most of the inflation problem seems to have been caused by the sudden hoarding tendencies of the rich — the result of a sudden realisation that not all financial claims were equal. This, of course, is reminiscent of the situation we find in the eurozone, where what were previously considered bonds of equal value suddenly became considered bonds of variable value.
What prompted that realisation, meanwhile, is more difficult to pinpoint. In the case of Europe it was arguably Greece’s bad fiscal management and revelations of deficit fiddling.
In the case of Rome I would speculate — and Professor Harris might disagree — that it was linked to the slowdown of the Empire’s expansion, a fact that limited the opportunity for plunder and income, and which had the effect of disturbing the balance of money and credit in circulation relative to economic output. The political and military upheaval associated with that era, linked in many ways also to Rome’s failure to expand and control its borders as it used to, also did not help.
Whatever the causes, once hoarding the mentality set in, the effects were brutal. And as the monetary system started to breakdown the first victims, as today, were unsurprisingly the Roman banks says Harris.
Yet even this had little to do with the Roman Empire’s ultimate collapse. As Harris continued:
The Roman empire collapsed as a political force in two phases, the first of which only began in the 370s, long after after Diocletian; the second phase only occurred in the late sixth century and the seventh.
Diocletian made the taxation system much more efficient than it had been for a long time before, perhaps ever… This guy was a general when he started out and wasn’t an economist and did a remarkable good job. [And by means we wouldn’t have enjoyed very much].
One could surmise therefore that the stealth debasement of coinage in the Roman Empire seemingly had no impact for as long as the Empire was growing and expanding, and for as long as the primary means for large value transactions was credit. That the currency was debased mattered little, since real wealth was stored in credit instruments, property and land — all of which was ultimately protected by the power and stability of the Emperor. And as long as that lasted so did confidence in the multi-tiered currency system.
With falling output, income, a banking breakdown and political instability, however, those claims could no longer be protected. Such circumstances, then, encouraged a flight to gold and coinage as a more secure and alternative store of value. And under those circumstances it’s understandable why the quality of the coinage suddenly began to matter.
Not to say there were not gold hoards before this time because there certainly were. But the economic motivations for them — at least on a collective large-scale basis — were potentially different during the hyperinflation period.
As for Diocletian, while his maximum price edict solution for hyperinflation was a clear and obvious failure, the same cannot be said for the taxation system he ultimately brought in. Indeed, it was by standardising the tax unit in relative terms — linking taxes to the needs of maintaining one soldier for a year, as set against the productive capacity of a single man, his family and his land — which helped to stabilise redemption rights against available Roman output, thus curbing inflation in the process.
In effect, it became a fairer — and more ration-based — way of distributing output in a time when scarcity and political uncertainty prevailed. Not to say there weren’t other negative repercussions, serfdom arguably being one of them, but that’s really for another post.
All in all, given that Diocletian was just a solider, the economic stability he achieved — against the odds — was actually a huge economic feat.
* In researching the post I contacted a number of academics — all of whom are expert voices on the topic — to make sure my rusty understanding of this period of ancient history was correctly remembered. My sincere thanks to them for the intensely interesting dialogue.
The context of the above was Ron Paul hauling out the Federal Reserve as the cause of all our troubles in a round table panel with Paul Krugman. Matt Yglesias also waded into some history:
Since the subject of inflation under Emperor Diocletian won't seem to stop dogging Paul Krugman, I thought I might try to bring a little information to the table following Prόdromos-Ioánnis Prodromídis 2006 paper "Another View on an Old Inflation: Environment and Policies in the Roman Empire up to Diocletian’s Price Edict" which brings a valuable multidisciplinary perspective to the price level changes experienced by the Roman Empire during the third century.Diocletian and Inflation (Slate)
As Prodromídis explains it, the inflation in question was really three separate trends that people sometimes run together.
In the first part of the century, the Roman Empire doesn't have a bond market it can raise funds on so instead it finances budget deficits by coining money. This leads to positive inflation, but of a fairly normal non-ruinous sort in the 3-4 percent range. That's about what America was doing during the Reagan administration and it's perfectly consistent with prosperity.
Then comes the "Crisis of the Third Century" when for about fifty years starting in 235 AD the Empire is wracked by invasion and civil war. This leads to a large increase in the price level primarily because of negative shocks to the real economy. Political disruption sharply reduces the quantity of market transactions conducted with money, leaving a higher ratio of coins to transactions and higher prices. By the same token, if marauding barbarians were to cut the Northeast Corridor off from the Farm Belt, the price of agricultural goods would skyrocket for reasons that are basically non-monetary in nature.
Then, just when the Emperor Diocletian has brought political stability back and is in fact making progress on solving the underlying problem, he decides to do something weird:
At any rate, the received wisdom is that, overall, the overwhelming/unprecedented increase in the money supply (especially ‘silver’/bronze issues) in the reign of Diocletian, eventually brought about pronounced price increases (Schwartz, 1973; Duncan-Jones, 1982; Harl, 1996). But, this is not the full story; though the second part of it, is perhaps not widely known or recognised for its inflationary impact: In 301, Diocletian apparently issued a Currency Edict, effective September 1st, doubling the face value of the silver and cop- per issues (Erim et al., 1971; Whittaker, 1980; Bagnall, 1985; Lo Cascio, 1996; Rathebone, 1996; Harl, 1996; and the literature mentioned therein). Perhaps he hoped to raise the purchasing capacity of his (military and administrative) staff or make the possession of these coins more attractive and influence the ‘unfreezing’ of the out- standing precious metal (gold) that was held in private stores.
Whatever it is he hoped to accomplish, the result was a final large one-time increase in the price level that left the legacy of Diocletian the Inflator.
Currency reforms of the sort Diocletian undertook still happen sometimes in the modern era, but they almost always go in the other direction. When a country has in the recent past suffered a bout of serious inflation that's just come to an end, sometimes the government will choose to put a mark on the new regime by basically striking a zero or two off the old currency. So in 1960, France introduced a New Franc and announced that one New Franc was worth 100 Old Francs, and that 1 Franc Coin of the old vintage could stay in circulation as one New Centime. You could describe the impact of that switch as a giant one-off deflation, but that's a pretty misleading way to think about it.
And following up on her earlier post, Izabella Kaminska describes some of the sophisticated systems of credit and banking that existed in the Roman Empire (no, everything wasn't bartered for gold, or even chickens:
So, apart from the roads — which go without saying — the aqueduct, sanitation, irrigation, medicine, education, wine, public baths and public order — what have the Romans ever done for us?What Have the Romans Ever Done For Us? (FT Alphaville)
Well, as we pointed out on Wednesday, there is a growing view among some ancient scholars that the Monty Python boys could and should have included credit in that list. And in in a big way, since the Roman economy likely featured a lot more paper money assets than most ancient historians care to admit. (Something a lot of modern-day economists and strategists who like throwing Roman coinage supply charts into their research don’t often explain.)
W.V Harris of Columbia University is probably best known for having made and substantiated the argument. And in my opinion, it’s certainly a very compelling one. Indeed, if you love the whole “what is money?” debate, have read David Graeber’s Debt and are still fascinated by the exogenous/endogenous nature of it all, I really recommend a download of his paper A Revisionist View of Roman Money from 2006, or a read of his 2008 book The Monetary Systems of the Greeks and Romans.
So, having explained why it’s not necessarily fair to blame Roman coinage debasement for third century hyperinflation and the ultimate fall of Rome — which, ironically, was much more likely the result of technological stagnation and political upheaval (and surely anyone who has ever played the computer game Civilization could have told you that) — it’s worth delving a little deeper into how the Roman monetary system really worked, and what it might genuinely teach us about our modern day economy.
So let’s begin with evidence for a credit economy in the first place and the idea that the standard definition of money “pecunia” is much far reaching than many suppose, starting with Republican times.
Harris notes in his 2006 paper that this is fairly easy to establish (our emphasis):
How did Cicero transfer the 31/2 million sesterces he paid for his famous house on the Palatine (Fam. 5.6.2 — this was by no means the largest property price we know of in the classical city of Rome), at a time when Rome had practically no gold coinage? It seems singularly unlikely that his slaves counted out and loaded 31/2 tons of silver coins and transported this cargo through the streets of Rome (not that Roman ideas of inconvenience were necessarily the same as ours). When a certain C. Albanius bought an estate from a certain C. Pilius for 111/2 million sesterces (Cic., Att. 13.31.4), did he physically send him this sum in silver coins? Without much doubt, these were at least for the most part paper, or rather documentary, transactions (the crucial documents will have been waxed tablets). The commonest procedure for large property purchases in this period was probably the one casually alluded to by Cicero elsewhere: a Roman knight becomes enamoured of a certain property at Syracuse, and ‘nomina facit, negotium conficit’, ‘he provides the credits [or “bonds”], <and so> completes the purchase’ (De off. 3.59).14 This practice is reflected in Cicero’s letters.15 And when in Pro Caecina Aebutius’ bid for a rural property being sold at auction is successful, he concludes the affair by ‘promising money to the argentarius’ (Caec. 16), and about that at least there was nothing in the least irregular: no one denied that the property had really been sold — the only question about the sale was whether Aebutius was acting for someone else. And you might buy in instalments: when Cicero bought out the share of the horti Cluviani that had gone to another legatee (Att. 13.46.3), he did so in three payments spread out over nearly a year (Att. 16.2.1), in effect taking a loan from the seller. None of which is to deny that coins might sometimes play considerable roles in major property transactions (see below).
As for bullion:
It is frequently imagined that, under the Republic at least, large payments were made in gold bullion, and there was indeed bullion in circulation; but there is no evidence in Cicero’s extensive writings or elsewhere that gold was a regular means of payment before the minting of gold under Caesar’s dictatorship. Expert scholars have sought for evidence that individuals bought things with gold or silver bullion under the Republic, and have found none. Crawford catalogued 335 republican coin hoards for the years 150 to 27 b.c.: exactly two of these 335 can be considered to have had a serious bullion component. And as Andreau points out, the archaeology of the Vesuvian cities, which has produced every imaginable kind of find, has never produced a single ingot of gold or silver. Of course we do have some explicit evidence of gold bullion in private hands under the Republic (Cic., Cluent. 179), but it was apparently a store of wealth, to be exchanged against more spendable assets in times of emergency. ‘Gold’ was what a very rich man such as Rabirius gave to a friend such as Cicero who was scurrying into exile (Rab.Post. 47), his credit shot — letters of credit might not be honoured if presented by a man in Cicero’s position, and coins once again were bulky — but this has nothing to do with ordinary business life. In imperial times, once again, we sometimes find gold bullion in private hands (e.g. Ulpian in Dig. 12.1.11.pr.), but it is implicitly not counted as pecunia, and seldom used in business or property transactions, as far as we know. There was an important exception, which does not invalidate the general conclusion: bullion sometimes had to be used to buy things from across the frontier, the eastern frontier at least: hence it was sometimes on sale at Coptos and Alexandria.
So, what you had for the most part was a wealth system made up of land, property, slaves, loan assets and bullion, for store of value and emergency use only — that is, to be used when your credit was shot or unknown to your counterparty.
But real proof that the traditional understanding of Roman money is mistaken appears according to Harris in 49 BC — when once again civil war disturbed the stability of monetary and credit network. As he notes — and this is highly relevant to today — there was something of a safe asset run:
Nervous creditors began to seek payment even of the principal ‘in silver’, i.e. silver coin, and one part of Caesar’s reaction was to ‘forbid anyone to hold more than 15,000 drachmas in silver or gold’ (Dio 41.38.1), which would have meant a Maoist revolution — most emphatically not Caesar’s purpose — if gold and silver coins had really been the only form of money. Quite obviously, his purpose was that the rich should lend, which would leave them with negotiable nomina.
As to those who question how Rome could have operated a credit economy without a viable clearing system, Harris says:
When economists define credit-money, they sometimes, admittedly, make matters more complicated than I have made them in this account, but that is because they quite naturally have recent and current conditions in mind, and not the world that existed before the invention of clearing banks. ‘A credit money system presupposes the existence of the institutions of private property, contracts, enforcement, and clearing’, says one. But historically speaking, as we shall see, the last of these four elements is a wonderful convenience but not in fact a necessity.
In the Roman scheme of things what you paid with was commonly pecunia, though other words such as nummi were also standard. It is therefore quite important that pecunia could have a very wide meaning. Naturally one ought not to press individual texts too hard. Gaius, for instance, remarks that ‘the term pecunia in this law [Sulla’s Lex Cornelia de sponsu, if that was its real name] means everything; and so if we stipulate for wine or wheat or a farm or a slave, this law must be observed’.
In another passage Ulpian claims that ‘the term pecunia includes not only coinage but every kind of money whatsoever, that is, every substance (omnia corpora); for no one doubts that substances are also included in the definition of money’ (Dig. 50.16.178). Clearly it is not Ulpian’s intention here to deny that documents could represent money but simply to assert that such things as wine and wheat could indeed count.
The important point for us in any case is that pecunia could include loans. And in fact Cicero in a published speech simply takes it for granted that nomina were a form of pecunia, that is to say that credit, at least in a certain form, was money (II Verr. 5.17), though in this case rather illiquid money (Verres’ victim had an interest in asserting that he could not pay because his assets were mainly in nomina). For Tacitus, it is reasonably clear that pecunia included credit.56 Hermogenianus ought really to have said that pecunia could include objects and legal claims, on certain conditions; but he was certainly not expressing an extreme or eccentric opinion — Justinian’s lawyers chose just these two definitions of money, Ulpian’s and Hermogenianus’, and no others.
Then comes the question of safe assets and investable loans. Harris notes that whilst temples and cities where known to provide loans, on the whole the Roman credit market was based on credit and debt transactions between private individuals:
But these [city and temple loans] are probably minor phenomena, whereas debt was in fact the life-blood of the Roman economy, at all levels. The normality of nomina (i.e. outstanding loans) among the assets of the rentier class has already been commented on: nomina were a completely standard part of the lives of people of property, as well as being an everyday fact of life for great numbers of others. Nothing could be further from the truth than a scholar’s contention that it was only under extraordinary circumstances that the creation of credit-money took place. In a modern economy the standard cautious investment for the well-to-do is, or at least used to be, government bonds; in the virtual absence of bonds, governmental or otherwise, the Roman well-to-do relied heavily on nomina. Describing the credit crisis of a.d. 33, Tacitus (Ann. 6.16.3) remarks that all senators were more extensively involved in money-lending than the law allowed (‘neque enim quisquam tali culpa vacuus’). We know that by the late Republic virtually every aristocrat whose affairs are attested in the sources lent money, and it was normal for the less illustrious senators to do so too. Augustus was evidently regarded as something of a stickler for having tried to keep the equites up to old-fashioned aristocratic standards by punishing those among them who borrowed money at lower rates of interest in order to lend it at higher ones (Suet. 39).
And as Harris says, there’s no reason why this pattern of lending should have changed much under the Empire. A point emphasized by the fact that Roman statutes reference practices and procedures for dealing with loan recoveries.
And it was in this context that early banks came into being, catering as much to the elite as to the lower classes, according to Harris.
In fact, during the credit crisis of 33 AD, banks were used by the Emperor — very much like today — as a transmission tool for newly created credit:
…the credit crisis of a.d. 33 concerned initially and above all senators, and when Tiberius decided to rescue the credit market, he did so by providing 100 million sesterces of loans, not directly, however, but through mensae (Tac., Ann. 6.17.3), which are not, as many interpreters have claimed, ‘specially established’ or ‘temporary’ banks (nothing of that in the sources), but just ‘banks’.
What’s more large portions of the debt and credit market were transferable in their own right — thus in some capacity money-like:
In Section i we saw a fair amount of evidence for non-coinage payments of sums large and not-so-large. Nomina were transferable, and by the second century b.c., if not earlier, were routinely used as a means of payment for other assets. This fact is recognized in a simple statement by the jurist Pomponius. The Latin term for the procedure by which the payer transferred a nomen that was owed to him to the seller was delegatio. There was in fact a market in nomina.
As for the importance of coinage over credit, we think the following is a good point to leave our wander through the Roman credit system on:
What is most interesting about the aggregate stock of silver coinage in the late Republic is that it apparently starts to decrease after about 79 b.c., having previously risen steadily for generations, though there is no reason to think that there was any major decline in economic activity. Whatever exact motives led the authorities to mint coins, we may presume that this decrease would not have taken place if it had caused serious inconvenience to the well-to-do. The reason why it did not have this effect, I suggest, was that a large, and probably increasing, proportion of their sizeable financial transactions was being carried out wholly or mainly by means of documents.
In short coinage is only one small part of the Roman monetary story.
As I commented in the original Yglesias post, John Perlin in A Forest Journey, makes the case that the deforestation of the Iberian Peninsula meant that the raw materials to smelt the metal in the mines was not there, causing the debasement (there was still recoverable metal in the mines). Thus, the debasement's ultimate cause was environmental overexploitation. Nothing grows forever.