Many hundred years ago, Europe was dominated by the mighty Roman Empire. In 269 BCE, military success allowed Rome to gain the wealth that allowed creation of the first Silver Roman coins, which were minted by the Emperor. These coins were a well respected currency even for trade outside the Roman Empire.
In 54 CE, the Roman Emperor Nero came to power, and for the first time, Roman Currency lost its value. In order to be able to mint a larger quantity of coins to spend, he tampered with the purity of the coins, dropping the silver content from being almost pure to approximately 90%. Emperors after Nero did not cease to lower the purity of the coins, and by the year 217, the silver content in coins was only 50%.
During what is called the ‘Crisis of the Third Century’ some 200 years later, Rome experienced a period of hyperinflation, as the silver content in their currency was lowered even further. This was a time where Roman faced great economic problems, invasions and civil unrest. As a result, trade broke down and landowners could no longer export their crops or import manufactured goods. They became largely self sufficient, and food was grown for subsistence and bartering.
Government revenue was extremely low, but government spending was not. During this time, governments had additional incentive to wall-in cities, and increase the size and power of their armies to combat the invasions and civil unrest. As a result, the silver content of coins had to be reduced further to accommodate the additional spending, fueling inflation.
The situation was not helped by the fact that in just a period of 50 years, there were at least twenty-six Soldier-Emperors, who would ruthlessly assassinate the previous emperors in order to seize power, and would then need the budget to meet the demands of buying off loyalty from their soldiers. Before 300 CE, the purity had already dropped to as low as 2% silver.
Evidence of inflation during the rapid drop in purity is shown by the standard prices of commodities such as bread doubling within a century. Additionally, documents regarding the pay of Roman soldiers also demonstrate this.
But how is this relevant to life today?
Although the Roman empire has been long gone; and the story of its currency is now just another page in history, the story of the ever increasing-creation of money is not. How similar is Roman monetary policy to that which we see applied seen by politicians nowadays? Perhaps a bit too similar for comfort.
Modern currency is unlike Roman currency, in that it is a fiat currency made by pieces of paper instead of an actual commodity of value. This means that it is much easier for money creation to occur in a modern economy. And yet, under a non-fiat system, it appears that the debasement of the Roman currency was still inevitable. What does this say about how confident we should be in modern currencies? Is it only a matter of time before the American Dollar or British Sterling become as worthless as simply bits of paper? Will trade in the economy simply be reduced to barter?
There is little doubt that currency is losing its value, but at what pace? Simply comparing the prices of some fairly standard goods to their prices 50 years ago suggests that it may be even greater than the inflation that in the Roman empire.
The situation in the US is not looking too hot either.
To some extent, evidence of this happening may already be here. The recent, but short, spike in the price of gold could be signs of confidence in currency systems dwindling, as people turn to placing their savings in commodities with solid value (such as gold) instead of trusting the fiat currency system in place. In fact, inflation has been to the extent that the scrap metal value for some coins is worth more than the value that the coin is meant to represent- many of the coins we have grown to know and love may soon become obsolete.
Maybe it’s not even a question of whether or not it will happen, but simply when.
Warwick Economics Blog 