All roads lead to Rome, argues Clarmond Advisors’ Chris Andrew
From the Roman Empire to our current information empire, the three attributes of money have not changed; money represents a store of value, a unit of accounting and a medium of exchange, says Chris Andrew, founder and CEO of Clarmond Advisors.
People trust that the government’s monopoly of issuing the legal tender shall maintain these elements of their hard earned money.
However, history shows that when a government gets into trouble with expenditure (military or welfare) it falls back to a tried and tested formula – monetary debasement.
The Roman Empire clearly demonstrated to successors this easy path of devaluation. At the time of Augustus, a Roman legionary was paid 225 silver denarii a year. A modius (1/4 bushel) of wheat, Rome’s staple food, cost 0.5 of a denarius, so a family of four needed 120 modii of wheat per year, or about 60 denarii, or 26% of income.
Forward 200 years to the reign of Caracalla, when a legionary was paid 675 silver denarii, certainly a good increase. However, for a proper view, we must look at what actually happened to the silver denarius and its purchasing power (see table).
The table charts the silver content of the denarius from the time of Augustus to Caracalla. It is evident that a legionary’s lot had not improved at all. His salary may have increased but his coin had devalued by 50%. Worse, the cost of wheat now rose to 2.5 denarii per modius, a 500% increase, taking up 44% of a legionary’s income.
Caracalla, realising the financial hole Rome was in, took two steps. First he introduced a new coin, the Antoninianus (equal to two old Denarii with half the silver content) and secondly, he extended Roman citizenship to every free inhabitant of the empire.
The quid pro quo was that inheritance tax was raised to 10% and became payable by these newly minted Roman citizens. In effect, the empire had declared itself bankrupt and thrown the burden onto its citizens.
Maybe the above story has resonance — an empire in fiscal trouble, deeply in debt, and deficit spending to stay afloat? But what happened to Rome next is even more important.
Over the next few decades the silver content of a denarius eventually fell to 2.5% and the price of wheat rose tenfold, but a legionary’s income did not keep up.
The Roman Empire is not the only example, there are much more recent and current comparisons.