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.
