Sound Money vs The Pathological State

Excerpts from a transcript of Prof. Joseph Peden's 50-minute lecture "Inflation and the Fall of the Roman Empire" given at the Mises Institute Seminar on Money and Government in Houston, Texas on October 27, 1984.

And scholars since Gibbon have devoted great deal of energy to examining that problem: how was it that the Roman Empire lasted so long, and did it decline or was it simply transformed into something else? That something else being the European civilization, of which we are the heirs.
I've been asked to speak on the theme of Roman history, particularly the problem of inflation and its impact. My analysis is based on the premise that monetary policy cannot be studied, or understood, in isolation from the overall policies of the state. Monetary, fiscal, military, political and economic issues are all very much intertwined. And the reason they are all so intertwined is, in part, due to the fact that the state, any state, normally seeks to monopolize the supply of money within its own territory.

Monetary policy therefore always serves, even if it serves badly, the perceived needs of the rulers of the state. If it also happens to enhance the prosperity and progress of the masses of the people, that is a secondary benefit; but its first aim is to serve the needs of the rulers, not the ruled. And this point is central, I believe, to an understanding of the course of monetary policy in the late Roman Empire.
To look at the mentality of the Roman emperors, we can look just at the advice that the Emperor Septimius Severus gave to his two sons, Caracalla and Geta. This was supposed to be his final words to his heirs. He said, "live in harmony; enrich the troops; ignore everyone else." Now, there is a monetary policy to be marveled at!
Caracalla did not adhere to the first part of that; in fact, one of his first acts was to murder his brother. But as for enriching the troops, he took that so seriously to heart that his mother remonstrated with him and urged him to be more moderate and to restrain his increasing military expenditures and his very burdensome new taxes. He responded by saying there was no longer any revenue, just or unjust, to be found. But not to worry, "for as long as we have this," he insisted, pointing to his sword, "we shall not run short of money."
He then went further by proceeding to debase the coinage
. The basic coinage of the Roman Empire to this time – we're speaking now about 211 [A.D.] – was the silver denarius introduced by Augustus at the end of the 1st century before Christ. Augustus had issued a silver coin, a denarius, that was about 95% silver, and that coin continued for the better part of two centuries as the basic medium of exchange in the empire.
By the time of Trajan in 117, it was only about eighty-five percent silver, down from Augustus' ninety-five percent. By the age of Marcus Aurelius, in 180, it was down to about seventy-five percent silver. In Septimius' time it had dropped to sixty percent, and Caracalla evened it off at fifty-fifty. Caracalla was assassinated in 217 and there then followed an age that historians refer to as the Age of the Barrack Emperors, because throughout the 3rd century all the emperors were soldiers and all of them came to their power by military coups of one sort or another. There were about 26 legitimate emperors in this century and only one of them died a natural death; the rest were either assassinated or died in battle, which will give you some idea of the change since this was totally unprecedented in Roman history – with two exceptions: Nero, a suicide, and Caligula, assassinated earlier.
Caracalla had also debased the gold coinage. Under Augustus this circulated at 45 coins to a pound of gold. Caracalla made it 50 to a pound of gold. Within 20 years after him it was circulating at 72 to the pound of gold, reduced to 60 at the end of the century by Diocletian, only to be raised again to 72 by Constantine. So even the gold coinage was in fact inflated, debased.
But the real crisis came after Caracalla, between 258 and 275. In a period of intense civil war and foreign invasions, the emperors simply abandoned, for all practical purposes, a silver coinage. By 268 there was only five tenths percent silver in the denarius. And prices in this period rose in most parts of the empire by nearly a thousand percent. The only people who were getting paid in gold were the barbarian troops hired by the emperors. The barbarians were so barbarous that they would only accept gold in payment for their services.
With Constantine's reform, this situation changed somewhat and, slowly but surely, the government began to move away from collecting taxes in kind and from paying salaries in kind, and began to substitute paying salaries in gold and collecting taxes in gold. Over the long run, this meant that the gold standard was strengthened and gold remained the real money of the Roman Empire. However, the inflation did not end for the masses of the people. In other words, gold was a hedge against inflation for those who had it, and these were principally the troops and the civil servants. The taxpayers had to buy these gold coins in order to pay their taxes and so, if they were wealthy enough, they could afford to buy these gold coins which were increasingly expensive in terms of token money. If they were poorer they simply couldn't pay the taxes and this meant they lost their lands in one form or another or became delinquents; and we hear constant references to people abandoning their land, disappearing.
As a matter of fact in the 3rd century this was a constant problem in Rome: all sorts of people were trying to escape the increased taxes that the military needed. The army itself [had grown] from the time of Augustus, when they had about a quarter of a million troops, [to where] by the time of Diocletian they had somewhat over 600,000. So the army itself had doubled in size in the course of this inflationary spiral, and obviously that contributed greatly to the inflation.
In addition, the administration of the state had grown enormously. Under Augustus essentially you had the imperial administration at Rome and the governors of different provinces, the secondary level of administration, and then the primary governmental units in the Roman Empire in this time were the cities, the municipalities. By the time of Diocletian this pattern had been broken apart. You had not one emperor but you had, under Diocletian, four emperors. Which meant four imperial courts, four Praetorian Guards, four palaces, four staffs, etc.
All these costs, then, are some of the reasons why the inflation took place; I'll get to others in a moment. To give you some idea of the situation after Constantine's reform of the gold, let me just briefly give you the figures for what it cost in terms of the silver coinage, or token coinage now, the denarius, for a pound of gold. In Diocletian's time, in the year 301, he fixed the price at 50,000 denarii for one pound of gold. Ten years later it had risen to 120,000. In 324, in other words 23 years after it was 50,000, it was now 300,000; and in 337, the year of Constantine's death, a pound of gold brought 20,000,000 denarii. And by the way, just as we are all familiar with the German currency of the [1920s] with the bigger stamp on it, the Roman coinage also has stamps and over-stamps on the metal, indicating multiples of value.
Now one interesting thing with all this inflation, I think it should be a great comfort to us: historians of prices in the Roman Empire have come to the conclusion that despite all of this inflation – or perhaps we should say, because of all this inflation – the price of gold, in terms of its purchasing power, remained stable from the first through the fourth century. In other words, gold remained, in terms of its purchasing power, a stable value whereas all this coinage just became increasingly worthless.
What were the causes of this inflation? First of all, war; the soldiers' pay rose from 225 denarii during the time of Augustus to 300 denarii in the time of Domitian, about a hundred years later. A century after Domitian, in the time of Septimius, it had gone from 300 to 500 denarii; and in the time of Caracalla, about 10 years later, it had gone to 750 denarii. In other words, the cost of the army was also rising in the terms of the coinage; so, as the coinage became more worthless, the cost of the army had to be increased. The advance in the soldier's pay in the rest of the 3rd century and into the 4th century is not known, we don't have figures. And one reason is that the soldiers were increasingly paid in terms of requisitions of supplies and goods in kind. They were literally given food, clothing, shelter and other commodities in lieu of pay – and this applied also to the civil service.
One of the Christian fathers, Saint Gregory Nazianzus, commented that war is the mother of taxes and I think that's a wonderful thing to keep in mind: war is the mother of taxes. And it's also, of course, the mother of inflation.
Now, what were the consequences of inflation? One of the odd things about inflation is, in the Roman Empire, that while the Roman state survived – the Roman state was not destroyed by inflation – what was destroyed by inflation was the freedom of the Roman people, and particularly the first victim was their economic freedom. Rome had basically a laissez-faire concept of state/economy relations. Except in emergencies, which were usually related to war, the Roman government generally followed a policy of free trade and minimal restriction on the economic activities of its population. But now under the pressure of this need to pay the troops and under the pressure of inflation, the liberty of the people began to be seriously eroded – and very rapidly.
We could start with the class known as the decurions. This was your prosperous, small and middle landowning class who were the dominate elements of the cities of the Roman Empire. They were the class from which were chosen the municipal counsels, the municipal magistrates and officials. Traditionally, they had viewed service in the governments of their towns as an honor and they had responded to this by donating, not merely their time, but their wealth to the betterment of the urban environment: building stadiums and bathhouses and repairing the streets and providing for pure water. These were considered benefactions, it was a kind of philanthropic element and their reward was, of course, public recognition and esteem.
This class, in the mid-3rd century, was assigned a task of collecting the taxes in the municipality that were being assessed by the central government. The central government could no longer collect its taxes effectively, so they made the decurion class collectively responsible for getting revenues and passing them on to the imperial government. The decurions, of course, had as much difficulty as anyone else in doing this, and the returns were, again, frequently inadequate so the government solved that problem by simply passing a law that any taxes that decurions could not collect from others, they would have to pay out of their own pocket. That's known as the incentive method for the tax collector. [laughter]
As you can well imagine, as the crises became greater and the economy was disrupted by civil conflicts and invasions and the effects of inflation, the decurions, strangely enough, no longer wanted to be decurions; and they began to abandon their lands, abandon their cities, and escape to wherever they could find refuge in other larger cities or other provinces. But they were not to be allowed to do that with impunity, and the law was then passed that any decurion discovered somewhere else was to be arrested, bound like a slave and carted back to his hometown where he was restored to his dignity as a decurion. [laughter]
This third century is also the period of the persecution of the church, and we find that at least some of the emperors must have had a sense of humor because when they passed a regulation that if a Christian was arrested and found guilty of capital punishment, namely believing in Christ, he was to not be executed but offered the option of becoming a decurion. [laughter]
Now, we may wish to find some lessons in this tale of [the] monetary policies of the late Roman Empire. The first lesson, I think, must be that if war is the health of the state, as Randolph Bourne said, it is poison to a stable and sound money. The Roman monetary crisis therefore was closely connected with the Roman military problem. Another lesson is that the problems become solvable when a ruler decides that something can be done and must be done. Diocletian and Constantine clearly were willing to act to protect their own ruling-class interest, the military and the civil service. Monetary reforms were necessary to win the support of the troops and the bureaucrats that composed the only real constituency of the Roman state, and the two-tier system was designed to this end. It brought about a stable monetary standard for the ruling group who did not hesitate to secure it at the expense of the mass of the population.
The Roman state survived. The liberty of the Roman people did not. When freedom became possible in the west in the 5th century, with the barbarian invasions, people took advantage of the possibility of change. The tax burden remained burdensome even after the gold standard was re-established. The peasantry had become totally alienated from the Roman state because it was no longer free. The business community likewise was no longer free, and the middle class of the urban cities was no longer free.
The economy of the west was perhaps more fatally weakened than that of the east, and when we read in the writings of the early 5th century Christian priest Salvian of Marseille his account of why the Roman state was collapsing in the west – he was writing from France, Gaul – Salvian says that the Roman state is collapsing because it deserved collapse; because it had denied the first premise of good government which was justice to the people. And by justice he meant a just system of taxation. Salvian tells us, and I don't think he's exaggerating, that one of the reasons why the Roman state collapsed in the 5th century was that the Roman people, the mass of the population, had but one wish after being captured by the barbarians: that they would never again fall under the rule of the Roman bureaucracy. In other words, the Roman state was the enemy, the barbarians were the liberators. And this undoubtedly was due to the inflation of the 3rd century. While the state had solved the monetary problem for its own constituents, it had failed to solve that monetary problem for the masses and continued to use an oppressive system of taxation in order to fill the coffers of the ruling bureaucrats and military.

The late Joe Peden, an instructor in history at Baruch College, was a close friend and colleague of Murray Rothbard's.

This old lecture is more relevant today than when Dr Peden presented it.
From his message, we infer that countries that fail to provide sound monetary policy for their citizens, eventually morph into a State that is pathological rather than benevolent.
In my view, North Americans and European countries for the most part are running rather than walking down this monetary path that leads to an absence of civil liberties as its final destination.
Unless we citizens can rein in the size (and cost) of government, it is likely our society will soon resemble the 3rd century Roman state.