Monday, 6 December 2010

Making the money sweat

During the Roman empire, there wasn't any quantitative easing,  or deficit financing. When the emperor had difficulty collecting taxes, he couldn't go to the bond market.  Certainly, there were money lenders around, but the likelihood of an imperial debt default ensured that premiums were high.  Anyone with spare cash would do their best to hide it from the rapacious Emperors.

Emperors could, as an alternative to taking out high interest loans, confiscate the lands and wealth of the rich.  It was a measure that created enormous disquiet within the imperial power base.  Expropriation had to be limited to one's enemies. 

A monetary system based on precious metals like gold and silver make it difficult for governments to try to inflate their way out of fiscal problems.   Nevertheless, this didn't stop emperors from trying.  A cash strapped emperor could clip the coins, extracting the precious metal that gave coins their value and ensured their use as a means of exchange. 

Clipping quickly becomes evident.  As the precious metal content is gradually clipped away, citizens begin to demand more coins for their products, creating inflation.  Indeed, coin clipping can quickly become a very democratic activity.  If an emperor can take a snip out of a coin, then so can a slave.

In the later years of the Empire, inflation had become a calamitous problem.  Clipping had debased the monetary system. Since soldiers couldn't be paid with coins that had any purchasing power, there was no law and order.  This meant there was no production and therefore no taxes. By the middle of the third century, anarchy prevailed.  Ambitious underpaid solders assassinated emperors and took power, only to be overthrown by other hungry usurpers.

Some emperors were sufficiently enlightened to try to curtail the coin clipping industry.  Coins with milled edges were introduced, making any attempt at tampering with the emperor's money more obvious.  Emperors followered up with the introduction of  unspeakable deterrents for anyone caught messing with the cash.

Grisly punishment did not deter citizens from coin tampering.  Wealthy Romans employed their slaves as "coin sweaters".  Coins were placed in woolen bags, and slaves were forced to jump up and down for days.  Friction from the jingling coins would deposit in the material of the bags, which would be burned and the gold separated from the ashes.

Today, there is no need to clip coins or make slaves dance around to extract precious metals.  Modern economies have perfected the art of inflation by new technologies such as monetary systems based on paper.  Instead of Emperors, there are monetary policy committees, bond markets and commercial banks. 

The inflationary impulse is still there.  Rather than honestly balancing taxes with expenditures, governments seek to run deficits and finance them by printing cash.

Nevertheless, modern proponents of inflation would do well to study the consequences of debasing the coinage.  Decline and fall, an explosion of corruption, and a world where speculators and grifters were favoured over honest producers. 

Inflation is never the answer; it is always the problem.


Stevie b. said...

But politicians will always seek the most expedient way out to keep them in power just long enough....long enough for the consequences to occur on someone else's watch. Thanks to politicians (and the electorate), we're in so deep that inflation would appear to be the only eventual answer. And let's face it, the West is over the hill anyway and we're moving to greater global economic equality in the long run. Meanwhile, just maybe we can carry on trying to extend and pretend for as long as we can get away with it.

Anonymous said...

I never approved of slavery.

Anonymous said...

You keep referring to clipping which wasn't the whole story.

In the early Roman days the silver coins were 90% silver; and by the end it was down to 20%.

Inflation of a less immediately noticeable variety!