The Roman Empire is often looked back on as the greatest of all time, with unbelievable power spanning Europe, Africa, and Asia. At its peak, populations were estimated to be up to 90 million people, over 20% of the population at the time. Everything; from their economy, to their armies was incredibly efficient. A lot of that is fundamentally down to their ability to keep track of their tax revenue, expenses, and document everything, leading to their unmatched prosperity and globally feared armies. The Roman economy is, in a lot of ways, remarkably similar to that of a modern-day capitalist system. Farmers, for example, often owned their own land, regardless of whether they were rich or poor. This really stood out for it's time, and is one of the key things that made the Romans, Roman.
From the beginning of the Republic, to the end of the Empire, the elites thought of themselves as land owners, and made their fortunes buying and selling both land, and property, but what the Romans really understood across the empire, and what helped them excel, was comparative advantage. Say two farmers like to eat bread, and drink wine. They both have the land available to grow the grapes, and wheat, and process them into bread and wine. However, if one of the farmers is better, more efficient, or has more suited land for growing wheat, while the other is better at growing grapes, it is in both parties best interest to focus on producing one thing, and trading. This means that both farmers end up with more bread, and more wine, than they would have otherwise produced alone. This helps explain the phenomenal economic and geographic expansion of the empire, and it's prosperity.
The Romans could utilize this concept even more, due to their huge size and coverage of different terrains, climates, and landscapes. This further propelled the Romans into prosperity as they could efficiently optimise the production of anything and everything they could ever want or need.
So what happens when you want to trade for someone’s bread, but they’re not interested in the wine you make? This is where the Roman monetary system comes in to play. The Romans used gold and silver coinage for their currency, with smaller denominations made out of copper and bronze. This meant that the farmer who wanted bread but only had wine to offer, could sell his wine, and use the money he obtained to buy him and his family bread. This worked great, because now not only could he trade with far more people than he could before, but he now has a great store of wealth, too. But what is it that makes the Roman money so great? The basic 5 characteristics of good money are:
- Acceptability - Everyone must accept it to purchase goods and services. Anyone can come up with a currency, but the certainty it will be spendable in the future gives it stability. Gold has been accepted as a form of money since the ancient Egyptians.
- Durability - It should last a long time. Bread, livestock, and other commonly traded goods rot, age and die, whereas gold is a limited resource which doesn’t deteriorate with time.
- Portability - It needs to be easy to carry around. Gold is so valuable, that only small quantities of it are needed at a time, meaning it can simply live inside a satchel or pocket, without the people being encumbered by the weight of their own wealth.
- Scarcity - It is often though that shells were used as the first currency, but as they are so abundant, anyone can just collect them, and it’s difficult to track how much a single shell is worth. Gold, on the other hand, is gathered at a rate almost identical to the world population growth, with more only created when a star explodes.
- Divisibility - It needs to be divided into small units. Roman coins were of a consistent size and shape, meaning it could easily be divided up. The addition of other, less expensive metals to the monetary system such as copper and bronze meant that smaller divisions could be achieved easily.
The Romans understood this, and thus had a strong system in place, and everyone prospered, and for the first 178 years, while Rome was still a republic, there was no evidence of big inflation. Most of Rome’s gold and silver was stored in vaults beneath the floor of their treasury, which was known as the Temple of Saturn (the design of which is almost identical to the US Treasury in Washington DC).
This all changed in the Second Punic War, the second of three wars between Carthage and the Roman Republic. It saw hundreds of thousands killed, the destruction of entire cities, as well as the massacre and enslavement of civilian populations. To pay for this war, the Romans begun deficit spending, by taking the coins they took in taxes, melting them down, and adding cheap and abundant base metals (most commonly copper) so they could mint more coins. This caused massive inflation, rapidly devaluing the savings of its people, and is accepted to be one of the main causes for Rome moving from a republic, to a dictatorship.
Now that the money had been debased, it was no longer in possession of all of the characteristics good money has. Specifically, It was no longer scarce. If the Romans could just “water-down” their money to create more of it, they could indefinitely create more money, while simultaneously reducing the value of the coins people already owned. They didn’t just add cheap metals to their coinage however, they also engaged in what is known as “coin-clipping”. Whenever a Roman would enter a government building, they would just simply clip the edge off their gold or silver coin, collect those up, and eventually melt them down and create new coins. When that wasn’t enough, they begun reevaluating their coins. This essentially equated to taking a coin, and stamping a new, higher value on to it.
Stable money leads to stable prices, which in turn leads to a stable society. The Empire ignored this however, and continued to expend, and go to war, debasing their money further and further each time in order to do so, and it wasn’t long until their money was detached almost entirely from their original metals. Rome became so desperate they allowed 'barbarians' join the Roman army, which led to them turning against Rome. Their economy collapsed, and over the coming years, so did the empire. Their move away from precious metals in their own right, to something far from it, is hardly a thing of the past.
Up until the outbreak of WWI, the United States had very high levels of precious metals in its coinage, and it’s treasury notes were backed by gold at a 1:1 ratio. From there, the USA debased it’s currency more and more to pay for WWII, the Korean war, and the Vietnam war until eventually in 1971, president Nixon severed the tie between the US dollar and gold completely.
When this happened, the American people revolted en masse, Nixon was impeached and the dollar was once again attached tightly linked with gold. Or at least, that’s what you’d expect. What did people really do? Nothing. Somehow, Nixon made it possible for the US to create currency at will - legally, and in turn the public felt the effects. The dollar was no longer truly scarce, and as anyone who had studied history could have predicted, inflation soared.
As it was in Rome, those who maintained their gold and silver maintained their purchasing power, as its sparsity couldn’t be controlled by the government. Gold went from $35 an ounce in 1971 to $850 an ounce in 1980. Governments have a long history of trying to cheat gold, via debasement, and market manipulation, but gold is gold, and it will always be valuable.
What makes this even more significant is the fact that from 1944 to 1971, the Bretton Woods agreement fixed the value of \$35 to one troy ounce of gold. Other currencies were pegged to the U.S. dollar at fixed rates with the promise that these currencies would all be exchangeable for gold. When Nixon detached the dollar from gold, he brought almost all the currencies of the world with it.
The currency we have now is known as fiat. Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have any intrinsic value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value. What this means is, our fiat currency only has value because we say it does. So what happens when doubt sets in? History has taught us that every fiat currency eventually ends up at its intrinsic value, nothing.
In summary, the most useful piece of advice we can extract from the fall of the Roman empire is to be weary, and acknowledge the consequences of creating masses amounts of currency at the expense of the population.