Inflation Is Tricky: Just Ask the Romans

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Empires Have Fallen Over Futile Efforts to Preserve Monetary Values

Cave Inflationem! – beware inflation! – must have been the battle cry of the crumbling Roman Empire. 

It’s 211 A.D., and the then-dying Roman emperor, Septimus Severus, is uttering his final words to his two sons: “Live in harmony; enrich the troops; ignore everyone else.” But upon Septimus’s death, one brother named Caracalla allegedly had the other murdered to become the sole Roman leader. Caracalla then doubled the pay to Roman soldiers and the taxes on Roman citizens needed to meet the new payroll. 

Not surprisingly, Caracalla quickly ran out of citizens to tax. So he granted full citizenship to every inhabitant of the vast Roman Empire. Yet costs could still not be covered. The innovative emperor then popularized an early form of quantitative easing: Caracalla ratcheted down the amount of silver melted down into each denarius, the coin of the realm at the time. 

But in 217 A.D., when Caracalla’s troops realized that a full 50% of the silver in the coins they were being paid wasn’t silver at all, they promptly murdered him. They then installed a series of rulers who actually paid them in a currency that maintained its value.

Roman rulers who did not pay their armies in stable currencies, tended to not last.

Given such stiff policy initiatives, it’s not surprising that taxes and prices rose. So began the first documented wave of inflation in world history. 

“The only people who were getting paid in gold were the barbarian troops hired by the emperors,” said Joseph R. Peden in his 1984 lecture Inflation and the Fall of the Roman Empire. (Editor’s note: The recording of Peden’s lecture is a simply fabulous podcast.)

Peden estimates that prices jumped during that period by nearly 1,000 percent. “The barbarians were so barbarous that they would only accept gold in payment for their services.” 

Over the next two hundred years – until the full collapse of the empire in the 5th century – Roman regulators effectively invented most every tactic used to this day to stabilize a devaluing currency: Various amounts of gold were tied to silver coins. New currencies were minted with names like argentus and aureus. Often they were quickly withdrawn and then reintroduced under different names.

Dozen of different currencies were introduced to stabilize prices.

Exotic new technologies, like bronze, were formed into coins to give the impression of value, similar to Bitcoin.  Individuals and cities then minted their own coins. But Roman governments refused to accept them. Instead, the state demanded taxes be paid with in-kind services. That is, slavery. More military was then required to enforce the part-time conscripted labor. The bureaucracy needed to manage it all became so complex that the empire split into 4 republics, each with its own costly courts, government, and military. 

Prices spiraled. By 301 A.D., one pound of gold bought 50,000 denarii. By 337, the same pound bought 20,000,000 denarii. 

… it worked, for a time. But overall, the value of Roman currency did nothing but collapse.

"The Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy," said Paden. 

In other words, the Roman state was the enemy; the barbarians were the liberators. 

Well Known Price History of Inflation. 

Financial historians who have studied inflationary cycles after Rome make compelling arguments that price increases follow well-worn patterns. Don Paarlberg, the late Eisenhower-era Purdue University economist, explored price history for 15 major inflationary waves, starting with ancient Rome. Paarlberg investigated the supply-driven inflation during the 14th-century Black Death. Similar to today, with much of the population locked at home, the few supplies that were left commanded steep premiums. Paarlberg studied the effects of waves of newly minted colonial gold and paper money on 16th-century Spain and 17th-century Europe. He examined the jumps in prices due to the 18th-century revolutions in America and France. He breaks down the two-sided inflation story of the Union and Confederate states during the American Civil War. He also totes up the pricing history for the 20th-century inflationary cycles in Germany, Russia, Hungary, China, Bolivia, Brazil, and the United States in the 1970s. 

Paarlberg’s tabular presentations are illuminating. While the hyper-inflationary cycles in 20th-century Russia, Germany, and China, are measured in the thousands of a percent, when price hikes are averaged over centuries, even Rome’s moderate inflation of 5.6% was enough to collapse an empire. 

Comparing the basics prices histories of inflation waves over times reveals, given enough time, even moderate inflation is terribly destructive.

Society's response to rising prices has been consistent: When national emergencies arise, governments react by either taxing, borrowing, or increasing the production of coins or scrip. They also requisition goods, fix prices, ration, subsidize services, impose austerity, and draw down existing stocks of wealth.

And at each of these steps, Paarlberg argued, the role of money is consistently and utterly misunderstood. Rather than trying to peer through the thousands of different goods and services that are struggling to price in increasing costs, Paarlberg said money itself is the lens to use to look for value. 

“Money is half of every price quotation,” he explained. “If prices go up, it is more likely that a change has occurred in the one element that is common to all prices – money.” 

Finally we get to Paarlberg’s point: “This notion that money is a unit of stable value, promoted by monetary authorities, enforced by law and still accepted by many people, is clearly unsustainable.”

The history of rising prices shows that value does indeed survive. There would be no John Maynard Keynes or Milton Friedman around to debate. Rome would have collapsed and that would have been that. 

It’s just that as prices rise, the tools we use to reference that value become ever less efficient.

The trick is to not overpay for a “certainty” that’s almost certainly not there.