Inflation has been with us a long time. If you know your history you'll know that the devastating consequences are an old story, retold repeatedly. It is armies that allow rulers to rule and money provides the means to buy and maintain armies. If you have enough guns (or swords, spears, etc) to rule a society you have enough to take control of the money supply. After that, inflation follows like night after day. The Roman Empire offers a fine illustration.
Between the regimes of Augustus and Diocletian Roman troop numbers more than doubled: from 250,000 to 600,000. An indication of the degree to which inflation funded this massive military is the fate of the Roman currency, the denarius. It was so utterly debased by a long string of Roman rulers that, when Diocletian came to power, the formerly silver coin was reduced to a copper plated token. By A.D. 268 it had fallen to one five-thousandth of its original value. Roman trade was already deteriorating into barter. Meanwhile, the middle class was rapidly eroding.
Not a fool, Diocletian fully appreciated the costs of this centuries long currency debasement and responded by declaring that taxes were no longer to be paid in coin, but in goods. What he of course never did was return the denarius to a money worth its weight in silver. Rather, he presumed to fix the effects rather than the cause. To this end he imposed a wide range of price, wage, production and anti-hoarding rules.
The most dramatic of these regulations was his A.D. 301 Edict, which prescribed the death penalty for violators. Though much bloodshed resulted, the Roman economic implosion through inflation continued to run rampant. In that A.D. 301 Edict, Diocletian fixed the price of gold at 50,000 denarii per pound. By 337, the year of Constantine's death, a pound of gold brought 20,000,000 denarii!
The last century of the Western Roman Empire was riddled with economic decay and social devolution. The market economy was abandoned by Romans in great numbers. The burden of the coercion to treat coins as possessing value that they simply did not have made rational economic decision making virtually impossible. Many fled the country - like latter day economic refugees. Others fled the cash economy into the countryside and took up voluntary serfdom. Common explanations in history books of feudalism arising after the fall of Rome have the chronology wrong. Feudalism arose, in the very bosom of Rome, as a perfectly rational response to a monetary economy crippled by a fiat currency verging on worthless.
Certainly, explanatory efforts to pinpoint any single cause for an event as epic as the fall of Rome would be too simplistic. There can be no doubt, however, those centuries of economic deterioration played an important role. Indeed, the common practice of portraying the barbarian invasions as a conquest is a bit misleading. For the majority of the Roman lower class - a category into which much of the middle class had fallen - the sackers of Rome were not conquers, but liberators: liberation from the denarius.
Those seeking insights for the contemporary world can find everything they need to know in this tale. A good generated out of the market for common benefit is corrupted by power and coercion . Coercive rulers (however serving of the people and the common good they claim themselves to be) transform the money from a market-valued currency into a coercively decreed value. This is what fiat means. The money is legally required to be treated as being worth something it simply is not. No less than in the story of the Emperor's new clothes, the people are required to pretend the patently false is unquestionably true, while the rulers skim off the actual value to pay the armies which allow them to run the whole scam from the start.
Naturally, rising prices run rampant as producers and merchants attempt to adjust reality to the devalued money which they're legally coerced to treat as having a make-believe value. If the rulers respond with price controls, as so often happens, the next step for producers and merchants is to compromise the quality or quantity of their goods, to save the value they're losing when forced to use the money as though it had a value it that the market does not afford it.
Wage, price, quota, etc., regulations all too often are subsequently imposed through coercion, attempting to suppress such natural market adjustments. The Roman example though provides a good predictor of what follows. Black markets spread and people merely trying to improve the quality of life of their families, through voluntary exchange, must abandon the monetary economy in all kinds of ways.
Back when our money was composed of coins, creating fiat currency was an elaborate and labor intensive exercise of re-minting coins of reduced precious metal composition. Today, when our money supply is whatever the central bank (the Federal Reserve in the U.S.) says that it is - simply adding zeros to a computer screen - inflation is so easy that massive abuse is virtually irresistible.
Bear in mind that money is just a commodity, as subject to supply-and-demand pressures as is any other commodity. When the supply increases it results in lower per-unit demand. This results in falling prices. Falling prices normally are a good thing, but not when it's the price that producers and merchants put on your purchasing power.
If you imagine that carrying your dollars in your wallet, or even locking them in your home wall safe, secures them from theft, think again. Inflation is the most insidious theft of all. Every time that the central bank inflates the money supply your dollars shrink - wherever you're storing them. Once more of them are circulating, each one is worth less. Consequently, merchants need more of them to pay their business expenses and so on down the line of their suppliers.
Rulers certainly are not prepared to admit their fault in this spiraling monetary catastrophe. Much easier and more convenient to blame rising prices on greedy bakers, bankers, merchants, businessmen, capitalists, corporations, Jews, or whoever is the scapegoat of choice at that time and place. All this merely obscures the fact that such businesses are merely trying to re-establish the market value of the debased money.
Nothing much has changed. Today, the fiat currency driven monetary policy of the United States and Europe seem on a path to replicate the demise of Rome. One might ask if they've learned nothing from history. Probably, though, it isn't a question of learning, or knowing, but simply that the payoff of inflation is just too rich for the rulers to pass-up. And, after all, who isn't susceptible to the self-serving myth that any monetary policy that benefits their own self interest is peculiarly in the interest of the common good?
The human inclination toward vanity and self-serving delusion wouldn't seem to be facing extinction any time soon. One wonders if submission to being bossed around and impoverished by maniacal rulers might, though, some day.
Between the regimes of Augustus and Diocletian Roman troop numbers more than doubled: from 250,000 to 600,000. An indication of the degree to which inflation funded this massive military is the fate of the Roman currency, the denarius. It was so utterly debased by a long string of Roman rulers that, when Diocletian came to power, the formerly silver coin was reduced to a copper plated token. By A.D. 268 it had fallen to one five-thousandth of its original value. Roman trade was already deteriorating into barter. Meanwhile, the middle class was rapidly eroding.
Not a fool, Diocletian fully appreciated the costs of this centuries long currency debasement and responded by declaring that taxes were no longer to be paid in coin, but in goods. What he of course never did was return the denarius to a money worth its weight in silver. Rather, he presumed to fix the effects rather than the cause. To this end he imposed a wide range of price, wage, production and anti-hoarding rules.
The most dramatic of these regulations was his A.D. 301 Edict, which prescribed the death penalty for violators. Though much bloodshed resulted, the Roman economic implosion through inflation continued to run rampant. In that A.D. 301 Edict, Diocletian fixed the price of gold at 50,000 denarii per pound. By 337, the year of Constantine's death, a pound of gold brought 20,000,000 denarii!
The last century of the Western Roman Empire was riddled with economic decay and social devolution. The market economy was abandoned by Romans in great numbers. The burden of the coercion to treat coins as possessing value that they simply did not have made rational economic decision making virtually impossible. Many fled the country - like latter day economic refugees. Others fled the cash economy into the countryside and took up voluntary serfdom. Common explanations in history books of feudalism arising after the fall of Rome have the chronology wrong. Feudalism arose, in the very bosom of Rome, as a perfectly rational response to a monetary economy crippled by a fiat currency verging on worthless.
Certainly, explanatory efforts to pinpoint any single cause for an event as epic as the fall of Rome would be too simplistic. There can be no doubt, however, those centuries of economic deterioration played an important role. Indeed, the common practice of portraying the barbarian invasions as a conquest is a bit misleading. For the majority of the Roman lower class - a category into which much of the middle class had fallen - the sackers of Rome were not conquers, but liberators: liberation from the denarius.
Those seeking insights for the contemporary world can find everything they need to know in this tale. A good generated out of the market for common benefit is corrupted by power and coercion . Coercive rulers (however serving of the people and the common good they claim themselves to be) transform the money from a market-valued currency into a coercively decreed value. This is what fiat means. The money is legally required to be treated as being worth something it simply is not. No less than in the story of the Emperor's new clothes, the people are required to pretend the patently false is unquestionably true, while the rulers skim off the actual value to pay the armies which allow them to run the whole scam from the start.
Naturally, rising prices run rampant as producers and merchants attempt to adjust reality to the devalued money which they're legally coerced to treat as having a make-believe value. If the rulers respond with price controls, as so often happens, the next step for producers and merchants is to compromise the quality or quantity of their goods, to save the value they're losing when forced to use the money as though it had a value it that the market does not afford it.
Wage, price, quota, etc., regulations all too often are subsequently imposed through coercion, attempting to suppress such natural market adjustments. The Roman example though provides a good predictor of what follows. Black markets spread and people merely trying to improve the quality of life of their families, through voluntary exchange, must abandon the monetary economy in all kinds of ways.
Back when our money was composed of coins, creating fiat currency was an elaborate and labor intensive exercise of re-minting coins of reduced precious metal composition. Today, when our money supply is whatever the central bank (the Federal Reserve in the U.S.) says that it is - simply adding zeros to a computer screen - inflation is so easy that massive abuse is virtually irresistible.
Bear in mind that money is just a commodity, as subject to supply-and-demand pressures as is any other commodity. When the supply increases it results in lower per-unit demand. This results in falling prices. Falling prices normally are a good thing, but not when it's the price that producers and merchants put on your purchasing power.
If you imagine that carrying your dollars in your wallet, or even locking them in your home wall safe, secures them from theft, think again. Inflation is the most insidious theft of all. Every time that the central bank inflates the money supply your dollars shrink - wherever you're storing them. Once more of them are circulating, each one is worth less. Consequently, merchants need more of them to pay their business expenses and so on down the line of their suppliers.
Rulers certainly are not prepared to admit their fault in this spiraling monetary catastrophe. Much easier and more convenient to blame rising prices on greedy bakers, bankers, merchants, businessmen, capitalists, corporations, Jews, or whoever is the scapegoat of choice at that time and place. All this merely obscures the fact that such businesses are merely trying to re-establish the market value of the debased money.
Nothing much has changed. Today, the fiat currency driven monetary policy of the United States and Europe seem on a path to replicate the demise of Rome. One might ask if they've learned nothing from history. Probably, though, it isn't a question of learning, or knowing, but simply that the payoff of inflation is just too rich for the rulers to pass-up. And, after all, who isn't susceptible to the self-serving myth that any monetary policy that benefits their own self interest is peculiarly in the interest of the common good?
The human inclination toward vanity and self-serving delusion wouldn't seem to be facing extinction any time soon. One wonders if submission to being bossed around and impoverished by maniacal rulers might, though, some day.
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