Pecunia Nervus Belli (money is the soul of war)
Over the ages, various forms of currency debasement or manipulation have been utilized by the ruling elite in an attempt to meet economic or societal goals. Perhaps the most well documented example from the Ancient era (3600 BC — 500 AD) can be attributed to the Romans.
In the very early Roman Republic, a system of bronze weights (aes rude) was used. Heavy cast leaded bronze coinage followed (aes grave), but that was still fairly unimpressive compared with the ‘struck’ silver coins of the Greeks.
That all changed during the Second Punic War (218–201 BC). It was a trying time for the Republic. While Hannibal terrorized Northern Italy and conflict raged on in the Iberian theatre, the Carthaginians managed to turn Syracuse (east coast of Sicily) against the Romans who were then fighting battles on three fronts, thanks to Hannibal’s crushing victory on Italian soil at the Battle of Cannae (216 BC).
Archimedes led the Syracusan defensive effort, wielding his fabled ‘heat ray’ as well as the ‘claw of Archimedes’ in an attempt to fend off the advancing Roman ships in the Siege of Syracuse (213–212 BC). Ultimately the Romans proved too strong. When Roman soldiers entered Archimedes’ quarters he famously quipped, “do not disturb my circles!”, before being slain. Or so the story goes…
Although the fables are certainly entertaining, the Siege of Syracuse was a crucial victory for the Romans and highly consequential for the course of human history for another reason. Years of war had put an enormous strain on the Roman treasury. War armories had an insatiable thirst for bronze, while flaky mercenaries on the outskirts of the Republic proved far more loyal if their salaries were paid in silver. Fortunately, the sacking of Syracuse yielded a loot of silver so large that it effectively financed a huge monetary injection. A silver lining, so to speak.
Enter the ‘Denarius’ circa 211 BC. Weighing in at 4.5 grams with a silver content between 95–98%, the Denarius (literal meaning: “tenner”) served as the backbone of the Roman economy for centuries. It was a particularly robust store of value throughout the remainder of the Republic and early stages of the Empire. After the debasement from 4.5g to 3.9g around 200 BC, its purity was left unadulterated, somewhat remarkably, for over 260 years. To their credit, Augustus, Tiberius, Caligula and Claudius all eschewed such temptation.
Alas, all good things must come to an end. Below you can see the devaluation of Imperial Roman coinage kicked off by Nero in 64 AD.
Source: https://www.ancient.eu/article/1338/follow-the-money--the-coinage-of-later-imperial-ro/
Coin #3 is a Denarius of Commodus. If you look closely you can see his name imprinted on the upper right side of the coin. As you probably gathered from Gladiator, it was pretty much all down hill after Marcus Aurelius passed (Commodus’ father). Caracalla had the bright idea of introducing the ‘Antoninianus’ — worth two Denarii but containing only 1.5x the silver content (coin #4). What could possibly go wrong? Indeed it proved to be an informative historical monetary shock illustrating the inevitability of Gresham’s Law — the claim that “bad money drives out good”. Hardly fooled, Romans naturally hoarded their more valuable Denarii and spent the inferior denomination such that the Denarius effectively vanished from circulation. Incidentally this phenomenon also explains why Bitcoin is unlikely to be ubiquitous in everyday commerce anytime soon. As long as there exist fiat currencies which are perceived to be dilution-prone, people will spend those instead. Thus, as myopic as the “digital gold” narrative may be, it does currently make the most sense. Bitcoin is a commodity, and to be honest I doubt it will ever graduate to be a ‘currency’ in the pervasive sense.
Things got a bit embarrassing as the third century progressed. The empire had overextended itself. Civil wars raged, cities were swept with plague and the economy spiraled into a depression amid rampant inflation. The trade was to go into as much debt as possible and purchase real assets. Short Denarius, long olive oil. It goes without saying, Caesar had an unlimited capacity to borrow, yet nothing in life is free! Visual Capitalist notes that if you were a Roman emperor in the third century — and there was a bunch of them — there was an 84% chance you’d be killed.
Source: https://commons.wikimedia.org/wiki/File:Fineness_of_early_Roman_Imperial_silver_coins.png
So there you have it. From the glory of the Republic to the beginning of its demise as a defunct imperial autocracy. The tale of a military powerhouse with sprawling influence across the globe. Encumbered with too much debt and committed to a bloated military budget, the ruling elite turned to currency debasement in an attempt to inflate their way out of an untenable situation. All sounds terribly familiar…
In a few hours we hear from Fed Chair Powell as he gives the opening remarks at Jackson Hole. 8am MDT Friday 23 August 2019. This year’s theme: “Challenges of Monetary Policy”. If he seems a little unnerved, it’s because he is. To be honest I’m not sure what’s more unsettling… the $17 trillion pile of negative yielding debt, or the Yellowstone Caldera — a super volcano so massive that it doesn’t erupt, it “super erupts”… and he’s smack bang in the middle of it. I don’t expect much. Gone are the days of the JH Bernanke bombs, but just in case it does get interesting… I’m on the lookout for any slight tilt towards the merits of MMT-style thinking, which is getting more and more airtime in academia and the media, or the role that ‘targeted’ fiscal expenditure and ‘structural reform’ could have to make the economic adjustment as ‘smooth’ as possible given where we are in the economic cycle. This sort of caper means debasement.
Have a lovely weekend.
