Wednesday, April 6, 2011

It's-a where you keep de water heater

Pardon me for a moment while I commit libertarian heresy.

We libertarians, we love precious metal currency. You don't have to go far online to find libertarians decrying modern worthless fiat money--paper tickets and cupro-nickel tokens--which are responsible for the ever-escalating inflationary forces that ruin economies, stealthily tax wages and savings, and temporarily prop up unsustainable government programs until the bottom falls spectacularly out of the whole system. And ancient Rome, the Eternal Analogy, gives us vindication in this belief.

From General interwebs

At left, a denarius of Vespasian from around AD 70, probably about 80% silver, give or take. At right, a double-denarius* of Diocletian from around AD 300, 2% silver if any.

Republican denarii had traditionally been nearly pure silver, and remained so until Nero sneakily** debased the coinage to around 80% in an attempt to cover his severe budget crisis. Over the next quarter-century, successive emperors would pretty randomly shift between reestablishing the integrity of the denarius and plundering it for quick cash, so that the purity of any given coin of that period can now only be established by core drilling and chemical testing.

After the first century, though, Rome settled into a slow decline in the integrity of its currency, the silver content gradually decreasing until, by Diocletian's time, the denarius was just a base-metal token with a symbolic trace of silver, or none at all, and the terrible inflation showed it. Under Julius Caesar, you could bring your standard one-modius bucket (about two gallons) to a Roman grain merchant and expect to fill it with wheat for about three sestertii, 3/4 of a pure-silver denarius. After Nero, the same bucketsworth cost about two of those 80% denarii of Vespasian. By Diocletian's time, his emergency price controls attempted to fix the price of a modius of wheat at 100 denarii, suggesting that it was trading for much more on the open market. Debasing the currency had caused an average inflation rate of at least 20% per year, so ruining the currency that--after those price controls worked as well as you'd expect--Diocletian ended up scrapping the centuries-old Augustan currency system entirely in favor of a new system based on the argentus, a roughly 80% silver coin. But the damage was already done, the economy now unrescuable, and Diocletian's successors reresorted to debasing the argentus to pay their bills. Inflation continued even faster than before, and before you know it, sic transit Roma invicta.

I've joked that while the Romans were stupid enough to let their emperors gradually debase their currency into worthlessness, we enlightened moderners had the wisdom to let our emperors do it all at once.

From General interwebs

At left, a 1964 US quarter, 90% silver as it had been from the very first coins of the Republic. At right, a 1965 quarter made entirely of copper and nickel.

America's broken 20th century political philosophy was fundamentally unsustainable, and the only way to pay for it was to follow in the footsteps of the Empire, refusing to learn from the past and replacing good money with worthless tokens--first tyranically seizing the people's gold in the 30s, then debasing the rest of our coins into worthlessness, leading to elevated inflation and a gradual slide toward catastrophe.


But this analysis, as much as I hate admitting it, is just not accurate. See, that high average rate of inflation in Rome wasn't spread evenly across the centuries between the initial debasement and Diocletian. Up to the mid-third century (by which point the denarius had been debased down to around 40-50% silver), the rate of inflation since the earliest records from the Republican era seems to have been about 1% per year***--very stable by today's standards. It wasn't until the late third century that inflation exploded to such an extent that it so badly mutated the average.

The debasement of the currency up to that period was done explicitly to inflate the money supply, but it didn't seriously inflate prices. By design or (much more likely) by chance, the increase in currency supply closely tracked the growth of the Roman economy: as the supply was increasing, the demand increased commensurately, keeping the value of the money stable. Had the emperors not increased the currency supply through debasement, they would actually have caused deflation, with its attendant woes. The hyperinflation that began in the late third century was caused by a lack of confidence in the currency, not by its debasement.

The active principle in preventing predatory inflation wasn't the silver per se, but popular resistance to inflation, as expressed through resistance to debasement. The emperors who needed to hide their incremental adventures in alloying could only increase the supply of money by so much at a time. The modern American government can print as many paper (or, for that matter, electronic) dollars as it wants, while a 30% silver denarius still requires you to have that silver on hand. Those late-Roman coins made with no silver at all during the period of hyperinflation? They were struck in such huge quantities that metal detectorists still pull them out of the ground in hoards of tens of thousands. You can buy some of them today for
under ten bucks.

A well-run government practiced in exercising restraint can theoretically walk the line, keeping the increase in supply of a fiat currency proportional to the growth in the economy; failing that, a vigilant and informed populace can refuse to tolerate irresponsible money-printing. But most libertarians don't regard well-run government practiced in exercising restraint or vigilant,
well-informed populations as sustainable resources. As in all things, any informed libertarian resistance to fiat currency must be a matter of balancing negatives on both sides: a commodity-based currency means regular deflation, but inhibits irresponsible overprinting of
money; a fiat currency allows you to avoid deflation, but requires you to trust your government or your citizens to be perpetually responsible and vigilant. There may be an intelligent case to make for precious metal currency, but simply condemning fiat currency through analogy with Rome ain't it.

[* - The Augustan currency system was clearly designed to confuse tourists. The most common coins were the small copper as, four of which make a large brass sestertius, four of which make a small silver denarius. But if the portrait of the emperor is wearing a radiate crown, the value is doubled to a dupondius, a quinarius argentus, and a so-called antoninianus, respectively. None is clearly marked with its denomination, and you can only tell by looking at the coin's size, material, and crownedness. Even so, the quinarius inscrutably breaks the pattern by being a tiny silver coin with a radiate crown. Some of the coin names that refer to numbers (denarius, quinarius and sestertius, referring to "ten", "five" and "two and a half") don't match up with their values, because their names are based on the pre-Augustan system in which an as was one-tenth of a denarius. This is why I love making my Cthulhu Invictus players deal with authentic currencies--converting their Roman money to Alexandrian drachmae on arrival costs slightly more sanity than looking Hastur in the eye.]

[** - Using a process of "surface enrichment", in which a copper-alloyed coin blank was soaked in acid, dissolving the copper in the surface and leaving a respectably deep layer of pure silver that would fool eyeball and touchstone tests. Later emperors would use additional "brightening" techniques to hide the ongoing debasement until the pretext became too strained to continue.]

[*** - Sitta von Reden's Money in Classical Antiquityhas a good, concise, well-cited discussion of the timeline of classical inflation and its underlying evidence, for those (like me) who can't bear to wade through the original German research papers.]


  1. Welcome to my heretic's den, young padawan. We have cookies.

    It often seems that libertarians are in search of a government that does not require that "your citizens to be perpetually responsible and vigilant." Such a government would be like a fire that does not require that the tenders be perpetually responsible and vigilant. Such a fire is nearly useless.

  2. At the same time, it's good policy to build systems that self-limit abuse wherever possible. Without mechanisms that inhibit abuse without constant tending, you end up with a government that constantly pushes on all fronts simultaneously, where a voter needs to choose between equally bad candidates based on a small subset of abuses that are most important to him, allowing other abuses to go on and limiting the effectiveness of elections as a means of constraining...

    [Hesitates. Takes a look at Google News.]

    Oog. I think I need to have a lie down.

  3. Well, my answer to that escaped the comment box and rampaged over to my blog.

  4. I tossed a gauntlet (of a sort) to the "sustainability" folks, contending that all else equal, consumption would be more prudent in the deflationary condition accompanying commodity money. One of the things an overtly inflationary monetary policy tends to do is drive consumption.

    I think I would prefer in any case to roll the dice on deflation, compared to the stealth tax that inflation imposes.

    You are correct in noting that it is loss of confidence in the currency that triggers hyperinflation. Plenty of evidence for that.

  5. Except we know what happens with deflation - and it's not pretty. It's been played out any number of times, and even very mild cases of deflation are MUCH worse than fairly major cases of inflation.

    It's not rolling the dice, it's playing russian roulette with a Glock 22 using reloads. If you're lucky, all that happens is the gun blows up.

  6. Sorry, been occupied. Do you see a difference between productivity-induced deflation (more goods and services for the same money stock) and post-bubble (sudden shortage of money) deflation? I ask because I want to know more about what you mean by mild deflation.

  7. Yes in cause, but not in effect. And the deflation of the housing bubble is having a HUGE negative effect. It's all very well and good to think of the collapse of the housing bubble as the las tact of a morality play, but that doesn't help the victims, the investors who are out their investment (including, you know, all the 401k investors), or the people who bought a prudent amount of house only to find themselves with an unexpected need to move.

    Deflation is what killed Japan's economy in the '90s. Contrariwise, low but manageable inflation from the mid-80's through at least the Y2K tech bubble. Arguably there wasn't enough inflation, because the economic pressures built up into bubbles (Y2K tech bubble followed by the real estate bubble).

    One of the reasons I am vehenently against physical ("hard") currency is that the rate of currency creation is not matched to the rate of economic growth. You can't really increase or decrease the amount of gold or silver or nickel or copper mined, whereas you can exert control of the fisc at election time.

  8. @!&&$$*#...I'm gonna have to start composing comments in Notepad++ and pasting, so as not to have my deathless prose eaten by the Magic Box Elves.

    The fisc may be controlled at election time, until the worst get on top. History suggests that that too is inevitable, and doesn't take all than long neither. ;-)

    That aside, I'm actually more interested in avoiding artificially cheap credit and its market-distorting effects than I am in currency per se. If the two issues can be separated, I'd be happy to talk about what that might look like.

    As for Japan, isn't the second lost decade an effect of the state's propping up the zombie banks, thus prolonging (if slowing) deflation? I am thinking of the difference between 1920-21 and 1929 in the U.S. (The latter is cribbed, in shorthand, from Mish Shedlock, but I think it's a fair argument.)

  9. So the Second Lost Decade in Japan was at least partially caused by (prolonged) deflation...

    Note, that would appear to be the path the current US government wants the fisc to go. However, the dose makes the poison. If the Fed can walk the line still, or w don't have a disastrous loss of confidence, we will be ok.

    Finally, I will note the the cost of freedom is eternal vigilance