Inflation and the Fall of the Roman Empire By Joseph R. Peden

Two centuries ago, in 1776, there were two books published in England, both of which are read avidly today. One of them was Adam Smith‘s The Wealth of Nations and the other was Edward Gibbon‘s Decline and Fall of the Roman Empire. Gibbon‘s multivolume work is the tale of a state that survived for twelve centuries in the West and for another thousand years in the East, at Constantinople.

Gibbon, in looking at this phenomenon, commented that the wonder was not that the Roman Empire had fallen, but rather that it had lasted so long. And scholars since Gibbon have devoted a great deal of energy to examining that problem: How was it that the Roman Empire lasted so long? And did it decline, or was it simply transformed into something else (that something else being the European civilization of which we are the heirs)?

I’ve been asked to speak on the theme of Roman history, particularly the problem of inflation and its impact. My analysis is based on the premise that monetary policy cannot be studied, or understood, in isolation from the overall policies of the state.

Monetary, fiscal, military, political, and economic issues are all very much intertwined. And they are all so intertwined because any state normally seeks to monopolize the supply of money within its own territory.

Monetary policy therefore always serves, even if it serves badly, the perceived needs of the rulers of the state. If it also happens to enhance the prosperity and progress of the masses of the people, that is a secondary benefit; but its first aim is to serve the needs of the rulers, not the ruled. This point is central, I believe, to an understanding of the course of monetary policy in the late Roman Empire.

We may begin by looking at the mentality of the rulers of the Roman Empire, beginning at the end of the 2nd century AD and looking through to the end of the 3rd century AD. Roman historians refer to this period as the “Crisis of the 3rd Century.” And the reason is that the problems of the Roman society in that period were so profound, so enormous, that Roman society emerged from the 3rd century very different in almost all ways from what it had been in the 1st and 2nd centuries.

To look at the mentality of the Roman emperors, we can look just at the advice that the Emperor Septimius Severus gave to his two sons, Caracalla and Geta. This is supposed to be his final words to his heirs. He said, “live in harmony; enrich the troops; ignore everyone else.” Now, there is a monetary policy to be marveled at!

Caracalla did not adhere to the first part of that advice; in fact, one of his first acts was to murder his brother. But as for enriching the troops, he took that so seriously to heart that his mother remonstrated with him and urged him to be more moderate and to restrain his increasing military expenditures and burdensome new taxes. He responded by saying there was no longer any revenue, just or unjust, to be found. But not to worry, “for as long as we have this,” he insisted, pointing to his sword, “we shall not run short of money.”

His sense of priorities was made more explicit when he remarked, “nobody should have any money but I, so that I may bestow it upon the soldiers.” And he was as good as his word. He raised the pay of the soldiers by 50 percent, and to achieve this he doubled the inheritance taxes paid by Roman citizens. When this was not sufficient to meet his needs, he admitted almost every inhabitant of the empire to Roman citizenship. What had formerly been a privilege now became simply a means of expanding the tax base.

He then went further by proceeding to debase the coinage. The basic coinage of the Roman Empire to this time — we’re speaking now about 211 AD — was the silver denarius introduced by Augustus at about 95 percent silver at the end of the 1st century BC. The denarius continued for the better part of two centuries as the basic medium of exchange in the empire.

By the time of Trajan in 117 AD, the denarius was only about 85 percent silver, down from Augustus‘s 95 percent. By the age of Marcus Aurelius, in 180, it was down to about 75 percent silver. In Septimius‘s time it had dropped to 60 percent, and Caracalla evened it off at 50/50.

Caracalla was assassinated in 217. There then followed an age that historians refer to as the Age of the Barrack Emperors, because throughout the 3rd century all the emperors were soldiers and all of them came to their power by military coups of one sort or another.

There were about 26 legitimate emperors in this century and only one of them died a natural death. The rest either died in battle or were assassinated, which was totally unprecedented in Roman history — with two exceptions: Nero, a suicide, and Caligula, assassinated earlier.

Caracalla had also debased the gold coinage. Under Augustus this circulated at 45 coins to a pound of gold. Caracalla made it 50 to a pound of gold. Within 20 years after him it was circulating at 72 to a pound of gold, reduced to 60 at the end of the century by Diocletian, only to be raised again to 72 by Constantine. So even the gold coinage was in fact inflated — debased.

But the real crisis came after Caracalla, between 258 and 275, in a period of intense civil war and foreign invasions. The emperors simply abandoned, for all practical purposes, a silver coinage. By 268 there was only 0.5 percent silver in the denarius.

Prices in this period rose in most parts of the empire by nearly 1,000 percent. The only people who were getting paid in gold were the barbarian troops hired by the emperors. The barbarians were so barbarous that they would only accept gold in payment for their services.

The situation did not change until the accession of Diocletian in the year 284. Shortly after his accession he raised the weight of the gold coinage, the aureus, to 60 to the pound — this was from a low of 72.

But ten years later, he finally abandoned the silvered coinage, which by this time was simply a bronze coin dipped in silver rather quickly. He abandoned that completely and tried to issue a new silver coin, called theargenteus, struck at 96 coins to the pound of silver. The argenteus was fixed as equal to 50 of the denarii (the old coinage). It was designed to respond to the need for higher-tariffed coins in the marketplace, to reflect the inflation.

Diocletian also issued a new bronze coin tariffed at ten denarii, called the nummus. But less than a decade later, the nummus had gone from being tariffed at ten denarii to now equaling 20 denarii, and the argenteus had gone from 50 denarii to 100. In other words, despite Diocletian’s efforts, the Empire suffered 100 percent inflation.

The next emperor who interfered with the coinage in a meaningful way was Constantine, the first Christian emperor of Rome. In the year 312, which is also the year he issued the Edict of Toleration for Christianity, Constantine issued a new gold piece, which he called by a new name, the solidus — solid gold. This was struck at 72 to the pound, so it was in fact debased more than Diocletian’s.

These were very large issues of coin and historians have puzzled over where Constantine got all the gold; but I think the puzzle is not so difficult once you begin to look at his legislation.

First of all, Constantine issued two new taxes. One was on the estates of the senators. This was rather new because senators were usually free of most taxes on their land. He also issued a tax on the capital of merchants; not their earnings, but their capital. This was to be levied every five years and it was to be paid in gold. He also required that the rents from the imperial estates, which were rented out to tenants, were to be paid only in gold.

Constantine took on the bullion reserves of his former partner Licinius, who had extracted, by force, bullion from the treasuries of the cities of the Eastern Empire. In other words, any city that had any gold bullion or silver bullion left in its treasury was simply requisitioned by Licinius. This gold passed on now into the hands of Constantine who had gotten rid of Licinius in a civil war.

We’re also told that he stripped the pagan temples of their treasuries. This he did rather late in his reign. In the early days he was apparently still somewhat afraid of angering the gods of Rome. As his Christianity became more fixed, he felt greater ease at robbing the temples.

Now, in one sense, Constantine’s reform began the reversal of the process: the gold coinage was sufficiently large that it began to take hold and to circulate more freely. However, the silver coinage failed and, what was worse, at no time in this period did the central government try to control the token coinage. The result was that token coinage was being minted not only by the imperial mints, but also by the mints of cities. In other words, if a city couldn’t pay its costs or pay the salaries of its employees, it simply struck up some token coinage and issued that.

By the late 3rd century we also begin to have the massive appearance of what numismatists call counterfeits. I would say it would be called credit money today. People need small change, and they simply go and manufacture it. All of this of course meant that the amount of token coinage in circulation was uncontrolled and increasingly massive.

Now, one of the things that had happened in the course of this 3rd-century inflation was that the government found that when it paid its troops in token coinage, or even in debased silver coins, prices immediately rose. Every time the silver value of the denarius dropped, prices naturally rose.

The result was that the government, in order to try to protect its civil servants and its soldiers from the effects of inflation, began to demand payment of taxes in kind and in services rather than in coin. They wound up, in effect, repudiating their own issued coins, not accepting them for tax collection purposes.

With Constantine’s reform, this situation changed somewhat and, slowly but surely, the government began to move away from collecting taxes and paying salaries in kind, and began to substitute collecting taxes and paying salaries in gold. Over the long run, this meant that the gold standard was strengthened and gold remained the real money of the Roman Empire.

However, the inflation did not end for the masses of the people. In other words, gold was a hedge against inflation for those who had it, and these were principally the troops and the civil servants.

The taxpayers had to buy these gold coins in order to pay their taxes. If they were wealthy enough, they could afford to buy these gold coins, which were increasingly expensive in terms of token money. If they were poorer they simply couldn’t pay the taxes; they lost their lands in one form or another or became delinquents. We hear constant references to people abandoning their land, disappearing.

“If a city couldn’t pay its costs or pay the salaries of its employees, it simply struck up some token coinage and issued that.”

As a matter of fact in the 3rd century this was a constant problem in Rome: all sorts of people were trying to escape the increased taxes that the military needed. The army itself had grown from the time of Augustus, when they had about a 250,000 troops, to the time of Diocletian, when they had somewhat over 600,000. So the army itself had doubled in size in the course of this inflationary spiral, and obviously that contributed greatly to the inflation.

In addition, the administration of the state had grown enormously. Under Augustus, essentially, you had the imperial administration at Rome, the secondary level of administration in the governors of different provinces, and then the primary governmental units in the Roman Empire in this time were the cities.

By the time of Diocletian this pattern had broken apart. You had not one emperor, but four emperors, which meant four imperial courts, four Praetorian Guards, four palaces, four staffs, etc.

Under them were four Praetorian prefectures, regional administrative units with their staffs and their budgets. Under these four prefectures, there were then 12 dioceses, each diocese having its administrative staff and so on.

Under the diocesan rulers, the vicars of the dioceses, we have the provinces. In Augustus’s time there were approximately 20 provinces. Three hundred years later, with no substantial increase in territory, there were over a hundred provinces. The Romans had simply divided and subdivided provinces for the purposes of maintaining internal military control of the regions. In other words, the cost of policing and administrating the Roman state became increasingly enormous.

All these costs, then, are some of the reasons why the inflation took place; I’ll get to others in a moment. To give you some idea of the situation after Constantine’s reform of the gold, let me just briefly give you the figures for what it cost in terms of the denarius, the silver coinage, or token coinage now, to buy a pound of gold.

In Diocletian’s time, in the year 301, he fixed the price at 50,000 denarii for one pound of gold. Ten years later it had risen to 120,000. In 324, 23 years after it was 50,000, it was now 300,000. In 337, the year of Constantine’s death, a pound of gold brought 20,000,000 denarii.

And by the way, just as we are all familiar with the German currency of the 1920s with the bigger stamp on it, the Roman coinage also has stamps over stamps on the metal, indicating multiples of value.

At one point, one of the Roman emperors had a marvelous idea: instead of issuing coins he devised a method to handle the inflation. He took brass slugs, put them in a leather pouch, and called it a follis; and people began passing these pouches back and forth as value. I guess it was the Roman equivalent to those baskets of paper we see in the pictures of Germany in the 1920s.

Interestingly enough, within ten years or so after that began, the word follis — which had meant this bag of coins — had now drifted to mean just one of those brass slugs. One of those slugs was now the follis. They couldn’t even keep the bags stable, they too were inflated.

Now one interesting thing with all this inflation should be a great comfort to us: historians of prices in the Roman Empire have come to the conclusion that despite all of this inflation — or perhaps we should say, because of all of this inflation — the price of gold, in terms of its purchasing power, remained stable from the first through the fourth century. In other words, gold remained, in terms of its purchasing power, a stable value whereas all this other coinage just became increasingly worthless.

What were the causes of this inflation? First of all, war. The soldiers’ pay rose from 225 denarii during the time of Augustus to 300 denarii in the time of Domitian, about a hundred years later. A century after Domitian, in the time of Septimius, it had gone from 300 to 500 denarii; and in the time of Caracalla, about 10 years later, it had gone to 750 denarii. In other words, the cost of the army was also rising in terms of the coinage; so, as the coinage became more worthless, the cost of the army had to be increased.

The advance in the soldiers’ pay in the rest of the 3rd century and into the 4th century is not known; we don’t have figures. One reason is that the soldiers were increasingly paid in terms of requisitions of supplies and goods in kind. They were literally given food, clothing, shelter, and other commodities in lieu of pay. This applied also to the civil service.

When one Roman emperor refused to pay a donative on his accession — this was a bonus given to the soldiers on the accession of the emperor — he was simply murdered by his troops. The Romans had had this kind of problem even in the days of the Republic: if the soldiers don’t get paid they rather resent it.

What we find is that the donatives had been given on the accession of a new emperor from the time of Augustus on. In the 3rd century, they began to be given every five years. By the time of Diocletian, donatives were given every year, so that the soldiers’ donatives had in fact become part of their basic salary.

The size of the army, I indicated already, had also increased. It had doubled from the time of Augustus to that of Diocletian. And the size of the civil service also increased. Now, all these events strained the fiscal resources of the state beyond its ability to sustain itself; and the ship of state was kept going, frequently by debasing, then by taxing, and then often simply by accusing people of treason and confiscating their estates.

One of the Christian fathers, Saint Gregory Nazianzus, commented that war is the mother of taxes. I think that’s a wonderful thing to keep in mind: war is the mother of taxes. And it’s also, of course, the mother of inflation.

Now, what were the consequences of inflation? One of the odd things about inflation is, in the Roman Empire, that while the state survived — the Roman state was not destroyed by inflation — what was destroyed by inflation was the freedom of the Roman people. Particularly, the first victim was their economic freedom.

Rome had basically a laissez-faire concept of state/economy relations. Except in emergencies, which were usually related to war, the Roman government generally followed a policy of free trade and minimal restriction on the economic activities of its population. But now under the pressure of this need to pay the troops and under the pressure of inflation, the liberty of the people began to be seriously eroded — and very rapidly.

We could start with the class known as the decurions. This was your prosperous, small- and middle-landowning class who were the dominant elements of the cities of the Roman Empire. They were the class from whom the municipal counsels, magistrates, and officials were chosen.

Traditionally, they had viewed service in the governments of their towns as an honor and they had donated, not merely their time, but also their wealth to the betterment of the urban environment. Building stadiums and bathhouses, and repairing the streets and providing for pure water were considered benefactions. It was a kind of philanthropic act and their reward was, of course, public recognition and esteem.

This class, in the mid-3rd century, was assigned the task of collecting the taxes in the municipality. The central government could no longer collect its taxes effectively, so they made the decurion class collectively responsible for getting revenues and passing them on to the imperial government.

The decurions, of course, had as much difficulty as anyone else in doing this, and the returns were, again, frequently inadequate. So the government solved that problem by simply passing a law that any taxes that decurions could not collect from others, they would have to pay out of their own pockets. That’s known as the incentive method for the tax collector. [laughter]

As you can well imagine, as the crises became greater and the economy was disrupted by civil conflicts and invasions and the effects of inflation, the decurions, strangely enough, no longer wanted to be decurions. They began to abandon their lands, abandon their cities, and escape to wherever they could find refuge in other larger cities or other provinces. But they were not to be allowed to do that with impunity, and a law was then passed that any decurion discovered somewhere else was to be arrested, bound like a slave, and carted back to his hometown where he would be restored to his dignity as a decurion. [laughter]

The 3rd century is also the period of the persecution of the church. We find that at least some of the emperors must have had a sense of humor because they passed a regulation that if a Christian was arrested and found guilty of a capital crime, namely believing in Christ, he was not to be executed but offered the option of becoming a decurion. [laughter]

Now, the merchants and the artisans were traditionally organized into guilds and chambers of commerce and that sort of thing. They now, too, came under government pressure because the government could not obtain enough material for the war machine through regular channels — people didn’t want all that token coinage. So merchants and artisans were now compelled to make deliveries of goods.

So that if you had a factory for making garments, you now had to deliver so many garments to the government requisitions. If you had ships, you had to carry government goods in your ships. In other words, what we have here is a kind of nationalization of private enterprises, and this nationalization means that the people who use their money and their talent are now compelled to serve the state whether they like it or not.

When people tried to get out of this they were then, by law, compelled to remain in the occupation that they were in. In other words, you couldn’t change your job or your business.

This was not sufficient because, after all, death is a relief from taxes. So the occupations were now made hereditary. When you died, your son had to take up your profession. If your father was a shoemaker, you had to be a shoemaker. These laws started by being restricted to the defense-oriented industries but, of course, gradually it was realized that everything is defense-oriented.

The peasantry, known as the coloni, were leaseholders on both imperial and private estates. They too were formerly a free class. Now under the same kinds of pressures that all smallholders were in in this situation, they began to drift away, trying to find better opportunities, better leases, or better occupations. So under Diocletian the coloni were now bound to the soil.

Anyone who had a lease on a particular piece of land could not give that lease up. More than that, they had to stay on the land and work it. In effect, this is the beginning of what in the Middle Ages is called serfdom, but it actually has its origins here in late Roman society.

“War is the mother of taxes.”

We know for example from studies of Palestine, particularly in the Rabbinical writings, that in the course of the 3rd and early 4th century the structure of landholding in Palestine changed very dramatically. Palestine in the 2nd century was mostly composed of peasant landholders with very small acreage, perhaps an average of two and a half acres.

By the 4th century those smallholders had virtually disappeared and been replaced by vast estates controlled by a few large landowners. The peasants working the estates were the same people, but in the meantime they had lost their land to the larger landowners. In other words, landholding became a kind of massive agribusiness.

In the course of this, the population of Palestine, still principally Jewish, also changed in that the ownership of land passed from Jews to Gentiles. The reason for that undoubtedly was that the only people with large amounts of cash who could buy out these smallholders who were in distress were, of course, the government officials. And we hear of them being called potentates, powerful ones. In effect there is a shift in the distribution of wealth in Palestine; and obviously, from other evidence, similar things were happening in other places.

With regard to taxes, they naturally increased across the board, but Diocletian decided that it was a very inefficient system that he had inherited. Every province more or less had its own system of taxation going back to pre-Roman times. And so he, with his military mind, demanded standardization.

And what he did was to have all wealth, which was of course landed wealth, assessed by a standard unit of productivity, the iugum. In other words, every person who had land was either singly, if he was a large landowner, or collectively, for those who were smaller landowners, put into a iugum.

This meant that the emperor for the first time had the basis of a national budget, something the Romans never had before. Therefore, he knew at any given time how many taxable units of wealth there were in any province. He could simply levy an assessment and expect to get a fixed amount of money.

Unfortunately, this took no account of the fact that in agriculture productivity varies considerably from season to season, and that if an army has passed through your district it may take years to recover. The result is that we hear of massive petitions from whole regions asking the emperor to forgive them their taxes, to remit five years of past dues, or to reduce the number of units of productivity to reflect the loss of population or materials.

As a matter of fact, when people began to say “it used to be I had five people paying this unit of taxation, but two of them have fled and it’s only half the land in production,” the response of the government was, “that doesn’t matter, you still have to pay for the land that is now out of production.” So, I mean, there was no relationship between taxes and actual productivity.

How did people protect themselves from this? Well, first of all, long-term mortgages virtually ceased to be given. Long-term loans of any kind disappeared. No one would lend unless they were guaranteed payment in gold or silver bullion.

In fact the government itself, under Diocletian and Constantine, refused to accept gold coins in payment of taxes, but insisted instead on gold bullion. So that the coins that you bought in the marketplace had to then be melted down and presented in the form of bullion. The reason was that the government was never sure how adulterated its own gold coinage really was.

Pledges and securities for crops and for loans were always in gold, silver, or indeed in crops themselves. In Egypt we have a document in which it seems that the banks had been refusing to accept coins with the divine image of the emperor; in other words, state issues. The government’s reaction to that, of course, was to force the banks to accept the coinage. This led to wholesale corruption in Roman society, as people refused to exchange coinage at the officially fixed tariffs but instead used the black market to exchange coinage on a market principle.

There was, obviously, flight from the land, massive evasion of taxes, people left their jobs, they left their homes, they left their social status. Now, Diocletian‘s final contribution to this continuing disaster was to issue his famous Edict on Maximum Prices, in 301 AD. This is a very famous instance of a massive effort by the government to limit inflation by price controls.

You have to realize that there was a little problem: the Roman Empire was a vast region running from Britain in the West to Iraq in the East; from the Rhine and the Danube to the Sahara.

It included areas of very sophisticated and very primitive economies, and thus the cost of living varied considerably from province to province: Egypt seems to have had the lowest cost of living; Palestine had a cost of living twice that of Egypt, and Roman Italy had a cost of living twice that of Palestine.

“The Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy.”

Diocletian ignored that; he just issued a single standard price for the entire empire. The result was that in Egypt, the Edict probably had no effect, because the maximum price fixed in the Edict was very rarely reached in Egypt. It was the people in Rome, of course, who found the maximum price lower than the market price.

The result of that, of course, was riots in the street, and the disappearance of goods. The penalty for violating this law was death, a very common penalty in Rome for almost anything.

The mentality of Diocletian, and the cause of the maximum price edict, comes out in the preface to the law. I’ll just quote briefly some of it. When you hear these first words I’d like you to pay attention, because you may have a different interpretation of them than what Diocletian meant.

He says, “if the excesses perpetrated by persons of unlimited and frenzied avarice could be checked” — he doesn’t mean himself [laughter] — “if the general welfare could endure without harm this riotous license, if these uncontrolled madmen, the unscrupulous, the immoderate, the avaricious, could be persuaded to desist from plundering the wealth of all, then all would be well.” Now who are these people? They are the merchants; they are the avaricious greedy types who cause inflation as we all know.

Then he speaks about himself and his three partners. “[We, the protectors of the] human race” — sounds familiar, doesn’t it? [laughter] “We are agreed that decisive legislation is necessary, so that the long-hoped-for solutions, which mankind itself could not provide” — you know, it’s the same stuff [laughter]; we can’t do anything ourselves, we need the legislator.

“By the remedies provided by our foresight [laughter], these things may be remedied for the general betterment of all.”

In fact, as you read through the rest of the thing it becomes clear that the reason the Edict on Prices was issued was that the soldiers were the principal victims of the inflation. Diocletian was afraid he was losing control of his army. And so the people who are to be protected are the soldiers and the other servants of the state.

Now Diocletian’s monetary reforms were tentative steps in the right direction; except for the Edict on Prices, which, by the way, simply didn’t work and was gradually dropped. But his steps were not radical enough.

Because of his inability to create a sufficient supply of gold and silver coinage, combined with his continued reliance on payments in kind for taxes and salaries, and his continued issuance of fiat bronze coinage in endless amounts, he failed to make a significant dent in the problem.

Constantine’s reforms were also partial, but of sufficient vigor and radical character to make a difference. Through his willingness to extract by compulsion the gold reserves of the taxpayers, forcing them to disgorge their bullion, he placed an ever-increasing supply of gold in the hands of government officials.

This was increasingly used to pay military bonuses, salaries for bureaucrats, and even payments for certain public works. Increasingly, then, a two-tier monetary system emerged in which the government, the soldiers, and the bureaucrats enjoyed the benefits of a gold standard while the nongovernmental portion of the economy continued to struggle with a rapidly inflating fiat currency.

The new gold solidus — circulated widely by its possessors, the government-salaried employees — sold at various market rates to customers who desperately needed it to pay their taxes. Thus the state had found a way to protect itself and its servants from the unwholesome effects of its own earlier inflationary cycle, while slowly withdrawing from the cumbersome and wasteful system of accepting taxes and paying salaries in kind. Meanwhile, the masses suffered from a massive injection of fiat money, which they had to accept in payment for government requisitions of gold, silver, or other commodities.

Now, we may wish to find some lessons in this tale of the monetary policies of the late Roman Empire. The first lesson, I think, must be that if war is the health of the state, as Randolph Bourne said, it is poison to a stable and sound money. The Roman monetary crisis therefore was closely connected with the Roman military problem.

Another lesson is that problems become solvable when a ruler decides that something can be done and must be done. Diocletian and Constantine clearly were willing to act to protect their own ruling-class interests, the military and the civil service.

Monetary reforms were necessary to win the support of the troops and the bureaucrats, who composed the only real constituency of the Roman state, and the two-tier system was designed to this end. It brought about a stable monetary standard for the ruling group, who did not hesitate to secure it at the expense of the mass of the population.

The Roman state survived. The liberty of the Roman people did not. When freedom became possible in the West in the 5th century, with the barbarian invasions, people took advantage of the possibility of change. The peasantry had become totally alienated from the Roman state because they were no longer free. The business community likewise was no longer free. And the middle class of the cities was no longer free.

The economy of the West was perhaps more fatally weakened than that of the East. The early 5th century Christian priest Salvian of Marseille wrote an account of why the Roman state was collapsing in the West — he was writing from France (Gaul). Salvian says that the Roman state is collapsing because it deserves collapse; because it had denied the first premise of good government, which is justice to the people.

By justice he meant a just system of taxation. Salvian tells us, and I don’t think he’s exaggerating, that one of the reasons why the Roman state collapsed in the 5th century was that the Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy.

In other words, the Roman state was the enemy; the barbarians were the liberators. And this undoubtedly was due to the inflation of the 3rd century. While the state had solved the monetary problem for its own constituents, it had failed to solve it for the masses. Rome continued to use an oppressive system of taxation in order to fill the coffers of the ruling bureaucrats and soldiers. Thank you. [applause]

This is a transcript of Professor Joseph Peden’s 50-minute lecture “Inflation and the Fall of the Roman Empire,” given at the Seminar on Money and Government in Houston, Texas, on October 27, 1984. The original audio recording is available as a free MP3 download. This transcript ran first at

“Helicopter money” – reality bites BIS, by Mr Claudio Borio

Since the Great Financial Crisis, central banks in the major economies have adopted a whole range of new measures to influence monetary and financial conditions. The measures have gone far beyond the typical pre-crisis mode of operation – controlling a short-term policy rate and moving it within a positive range – and have therefore come to be known as “unconventional monetary policies.” To be sure, some of these measures had already been pioneered by the Bank of Japan roughly a decade earlier in the wake of that country’s banking crisis and uncomfortably low inflation. But no one had anticipated that they would spread to the rest of the world so quickly and become so daring, testing the boundaries of the unthinkable.

As growth has remained disappointing and inflation stubbornly below targets, the range and size of these measures have increased. Hence the growing use of long-term liquidity support, large-scale asset purchases, sizable increases in bank reserves (so-called QE) and, of late, even the introduction of negative policy rates. In the wake of these measures, the central banks’ monetary base (cash and bank reserves) has ballooned in step with the overall size of their balance sheets (see graph). 

With central banks delving further down into their box of unconventional tools, calls for them to take a deep breath and pull out “helicopter money” have intensified. What was just a thought experiment designed to shed light on how money affects the economy is now threatening to become a reality. Proponents of this tool – more soberly described as “overt money financing” of government deficits – see it as a sure-fire way to boost nominal spending by harnessing central banks’ most primitive power: their unique ability to create money at will. But can helicopter money work in the way its proponents claim? And is the balance of benefits and costs worth it? Our answer to both of these questions is no.

Proponents argue that helicopter money is special because it amounts to a permanent increase in non-interest bearing central bank liabilities (“money”) as the counterpart of the deficit. This form of financing is most effective because money is free and debt is not. Permanent monetary financing means less government debt and thus lower interest payments forever. All else equal, this saving should boost nominal demand, as there would be no need to raise additional taxes. Moreover, the argument continues, the central bank is then free to increase interest rates again whenever it wishes while the lower amount of debt outstanding will still yield savings. This is the best of all possible worlds: Demand is boosted without the collateral damage of prolonged exceptionally low interest rates.

Devil in the details

Or so it seems. But the devil is in the details.

As we have argued elsewhere, the reasoning may be correct in the stripped-down models people have in mind, but not in reality. In fact, the central bank faces a stark choice: Either helicopter money results in interest rates permanently at zero, so that control over monetary policy is lost forever, or else it is equivalent to either debt or to tax-financed government deficits, in which case it would not yield the additional boost. Since losing monetary policy control forever is not a feasible option, helicopter money is just fiscal policy dressed up.

The reason is hidden in an obscure but critical corner of the financial market. Contrary to what the stylized models suggest, it is not the amount of cash that determines interest rates but what the central bank does with bank reserves (commercial banks’ deposits at the central bank), over which it has a monopoly. Monetary deficit financing will, in effect, amount to an equivalent increase in bank reserves. If the central bank issued more cash than people demanded, the amount in excess of desired balances would inevitably be converted into bank deposits and then switched by banks into reserves (see in the graph how steadily and slowly cash grows, reflecting the demand for it). If the government issued checks, the same would happen. If the reserves are non-interest bearing – as they must be for helicopter money – the increase will inevitably also drive the short-term (overnight) rate to zero. This is because when the system as a whole has an excess of reserves, no one wants to be left holding it but someone must.

The problem arises once the central bank decides to raise interest rates again, as this, alas, would not be consistent with helicopter money. To do so, the central bank has only two options. Either it pays interest on those reserves at the policy rate, in which case this is equivalent to debt financing from the perspective of the consolidated public sector balance sheet – there are no interest savings. Or else it imposes a non-interest bearing compulsory reserve requirement to absorb the reserves, but this is equivalent to tax financing – someone in the private sector must bear the cost. While the tax would in the first instance fall directly on banks, they could decide to pass it on to their customers — for example, in the form of higher intermediation spreads.

Thus, either helicopter money comes at a prohibitive price – giving up control over monetary policy forever – or else, choreography and size aside, in its watered-down version it is not very different from what some central banks have already been doing: engineering temporary increases in reserves which may happen to coincide with increases in government deficits (a form of QE). Views about QE’s effectiveness differ, but we would be talking about “more of the same.” Such a policy already exploits the synergies between ultra-low interest rates and fiscal policy so as to enhance any expansionary impact that fiscal policy may have.

That said, choreography and size do matter. And they don’t speak in favor of the tool. Imagine policymakers went down this route, announcing that they were embarking on a “new” policy and explicitly linking the increase in reserves with higher public sector deficits. They could hide the inconvenient truth and renege on their promise not to raise rates. But this would hardly be an example of good policy, and in any case its effectiveness would at best be doubtful – the private sector would surely anticipate this possibility to some extent, thereby tempering the impact of the signal. Alternatively, policymakers could hope that the fanfare surrounding the tool would induce people to spend more. This is a possible but by no means obvious outcome. And in any case, unless the exercise is repeated over and over again on a large scale, its impact is likely to be only temporary.

And therein lies the danger. It is hard to imagine helicopter money not ending up in fiscal dominance, the outcome that would obviously be inevitable in its purest form, where interest rates are kept at zero forever. Sooner or later this could indeed erode the value of money, but at the cost of losing the public’s confidence in our monetary institutions – a trust so painfully gained over the years – and with unpredictable consequences. It would be a Pyrrhic victory.

Thomas Paine, Champion of Sound Money The Foundation for Economic Education

Between writing his well-known revolutionary liberal tracts Common Sense (1776) and The Rights of Man(1791), Thomas Paine contributed knowledgeably to a 1785-6 debate over money and banking in Pennsylvania. Paine defended the Bank of North America’s charter and its operations in a number of lengthy letters to Philadelphia newspapers during 1786, followed by a December monograph that summarized his case, Dissertations on Government; The Affairs of the Bank; and Paper Money.[1]

“The natural effect of increasing and continuing to increase paper currencies is that of banishing the real money.” Paine argued that to repeal the bank’s charter violated both the rule of law and the maxims of sound economic policy. His writings show that he well understood the benefits of banking. Although proponents of the repeal accused Paine, publicly known to be in dire financial shape, of being paid by the BNA’s proprietors for defending it (one called him “an unprincipled author, who lets his pen out for hire”), Paine vociferously denied the charge, and historians (such as Philip S. Foner, who edited an anthology of Paine’s works), have found no evidence to support the accusation.

Prima facie evidence for Paine’s sincerity is found in his marshalling of serious arguments that were consistent with the classical liberal principles of his earlier writings.

Here’s the backstory: The Continental Congress chartered the Bank of North America, headquartered in Philadelphia and headed by Robert Morris and Thomas Willing in 1781. Considering a Commonwealth of Pennsylvania charter to be a sounder authorization, in 1782 the bank sought and received a charter from the Pennsylvania legislature. After the Revolutionary War’s end in 1783, as historian Janet Wilson noted, farmers in western Pennsylvania with large debts and tax arrears “set up a cry for paper money” to be issued by the Commonwealth.[2] These state-issued notes would not be presently redeemable, but would be receivable for future tax payments.

The clamor for irredeemable paper money, he wrote, derived from “delusion and bubble.” The inflationists understandably saw the BNA as a barrier to their plan. If the bank valued the state paper below its par value, while BNA banknotes and checks traded at par in terms of the silver dollars for which they could be immediately redeemed, real demand for the state paper currency would be low. Better for the sake of state paper to eliminate the superior alternative. Hence, with the legislature voting to authorize an issue of state notes in mid-1785, the inflationists demanded repeal of the bank’s charter.

They were further motivated by the bank proprietors’ public opposition to state paper. The legislature debated and then repealed the charter in September 1785. The BNA continued to do business, on a smaller scale, under its 1781 charter from the Continental Congress. (The 1st US Congress would not meet until March 1789.) Eighteen months after repeal, in March 1787, following a pitched public discussion and the election of pro-bank legislators in fall 1786, the charter was restored.

The clamor for irredeemable paper money, wrote Paine in 1786, derived from “delusion and bubble.”[3]Yes, the irredeemable paper currency issued during the war as a matter of necessity had provided revenue “while it lasted,” but not as a free lunch, but rather by taxing individual money-holders through price inflation and currency depreciation. Since its demise, “gold and silver are become the currency of the country.”[4] Those thinking that state paper will relieve a “shortage” of specie have it backwards: it is precisely the issue of irredeemable paper that drives out gold and silver. On this point Paine argued with impeccable Humean logic:

The pretense for paper money has been, that there was not a sufficiency of gold and silver. This, so far from being a reason for paper emissions, is a reason against them. As gold and silver are not the productions of North America, they are, therefore, articles of importation; and if we set up a paper manufactory of money it amounts, as far as it is able, to prevent the importation of hard money, or to send it out again as fast it comes in; and by following this practice we shall continually banish the specie, till we have none left, and be continually complaining of the grievance instead of remedying the cause. Considering gold and silver as articles of importation, there will in time, unless we prevent it by paper emissions, be as much in the country as the occasions of it require, for the same reasons there are as much of other imported articles.[5]

Critic of Monetary Stimulus

Paine understood that any stimulus from injecting money was only temporary, because issuing more paper money does not create any more wealth. He even offered the binge drinking / hangover analogy that has, in modern times, become commonplace:

Paper money is like dramdrinking, it relieves for a moment by deceitful sensation, but gradually diminishes the natural heat, and leaves the body worse than it found it. Were not this the case, and could money be made of paper at pleasure, every sovereign in Europe would be as rich as he pleased. But the truth is, that it is a bubble and the attempt vanity.[6]

State paper money became not just imprudent but unjust when it was combined with a legal tender law compelling the acceptance of depreciated paper dollars where a contract called for payment in silver or gold dollars:

As to the assumed authority of any assembly in making paper money, or paper of any kind, a legal tender, or in other language, a compulsive payment, it is a most presumptuous attempt at arbitrary power. … [A]ll tender laws are tyrannical and unjust, and calculated to support fraud and oppression.[7]

For a legislator even to propose such a tyranny should be a capital crime [!]:

The laws of a country ought to be the standard of equity, and calculated to impress on the minds of the people the moral as well as the legal obligations of reciprocal justice. But tender laws, of any kind, operate to destroy morality, and to dissolve, by the pretense of law, what ought to be the principle of law to support, reciprocal justice between man and man: and the punishment of a member who should move for such a law ought to be death.[8]

Responding to an anti-BNA petition, which claimed that “the said bank has a direct tendency to banish a great part of the specie from the country, so as to produce a scarcity of money, and to collect into the hands of the stockholders of the said bank, almost the whole of the money which remains amongst us,” [387-8 n] Paine argued that the issue of immediately gold-redeemable banknotes gives a commercial bank like the BNA a strong reason to retain sufficient gold reserves:

Specie may be called the stock in trade of the bank, it is therefore its interest to prevent it from wandering out of the country, and to keep a constant standing supply to be ready for all domestic occasions and demands. … While the bank is the general depository of cash, no great sums can be obtained without getting it from thence, and as it is evidently prejudicial to its interest to advance money to be sent abroad, because in this case the money cannot by circulation return again, the bank, therefore, is interested in preventing what the committee would have it suspected of promoting. It is to prevent the exportation of cash, and to retain it in the country, that the bank has, on several occasions, stopped the discounting notes till the danger had been passed.[9]

Here Paine failed to add that the public’s voluntary substitution of banknotes for specie, although it does not banish any specie that is still wanted, does allow the payment system to conduct a given volume of payments more economically, with less specie. The ability to export the share of specie thus rendered redundant, in exchange for productive machines and material inputs, was a growth-enhancing benefit of banking that Adam Smith had emphasized in The Wealth of Nations published ten years earlier.

In response to the claim that the bank “will collect into the hands of the stockholders” the specie remaining in the country, Paine explained that a bank’s specie reserves are not the net worth owned by its shareholders. Rather the reserves are held to redeem its liabilities, and thus are “the property of every man who holds a bank note, or deposits cash there,” or otherwise has a claim on the bank.

The Bank of North America at the time held the first and as yet only bank charter granted by the legislature of Pennsylvania. Critics damned the BNA as a privileged monopoly. Legislator John Smiley asserted that the charter repeal “secured the natural rights of the people from invasion by monopolies.” This view – later echoed by the Jeffersonians and Jacksonians in their opposition to the First and Second Bank of the United States – is of course paradoxical.

The Cure for Monopoly Power

The cure for monopoly power created by exclusive charter (incorporation) is to grant charters freely, to go from one to a multiplicity of charters. It is not to go from one to zero charters. If more banks were free to enter but simply hadn’t yet, then the BNA was a monopolist only in the benign sense that the entrepreneur who creates a new market (thus expanding and not restricting trade) is the single seller until others arrive. Eventually additional chartered banks did enter the Pennsylvania market: the (First) Bank of the United States (chartered by the US Congress) in 1791, and the Bank of Pennsylvania (state-chartered) in 1793.

In a later work criticizing the Bank of England (which did have an exclusive charter to issue banknotes as a corporation), Paine unfortunately seemed to blur the distinction between banknotes and irredeemable paper money. He made the valid point that banknotes held, unlike gold held, are not net national wealth (because they are liabilities of the issuer). Then he declared:

the rage that overran America, for paper money or paper currency, has reached to England under another name. There it was called continental money, and here it is called bank notes. But it signifies not what name it bears, if the capital is not equal to the redemption. … The natural effect of increasing and continuing to increase paper currencies is that of banishing the real money. The shadow takes place of the substance till the country is left with only shadows in its hands.[10]

To reconcile this passage with his previous writings, we must suppose that Paine is not criticizing banknotes in general, but the Bank of England in particular for holding inadequate reserves relative to its growing note-issue.

But this raises the question: Why would the BOE want to hold inadequate reserves when the BNA (as he had argued) did not? Paine might have explained this (but unfortunately did not) by Parliament’s implicit guarantee that it would not penalize the BOE for a suspension of payments, giving the Bank a moral-hazard incentive to skimp on reserves. When the Bank of England did suspend payments in 1797, forced by a run on the bank prompted by the threat of an invasion by Napoleon’s troops, Parliament did in fact immunize the Bank against note-holder lawsuits. Paine ten years ahead warned that the BOE might suspend in 1796, which was only one year off if we consider it a prediction:

A stoppage of payment at the bank is not a new thing. Smith in his “Wealth of Nations,” book ii. chap. 2, says, that in the year 1696, exchequer bills fell forty, fifty and sixty per cent; bank notes twenty per cent; and the bank stopped payment. That which happened in 1696 may happen again in 1796.[11]

To be clear, Paine anticipated trouble from the growing British public debt, not from threat of invasion. But the two were not unrelated.

Una contribución al debate de las ideas

Epílogo libro M. King, ‘El fin de la Alquimia’ (Deusto, 2016)

La gran virtud del libro del que tengo el honor de escribir unas breves líneas a modo de epílogo, es que se trata de un libro sobre ideas. El texto no es una crónica de como el autor contribuyó a salvar el mundo –como suele suceder en las obras de este perfil–, sino que es una reflexión profunda, enriquecida con la dilatada y rica experiencia de quién escribe, sobre las causas últimas de la grave crisis financiera que tan importantes cambios y consecuencias han supuesto en el escenario económico global. De hecho, no se trata de un libro sobre la crisis propiamente dicha, sino de una obra sobre la banca y el dinero que se sirve de la crisis como hilo conductor. A diferencia de otras obras del mismo género, Mervyn King realiza un esfuerzo por profundizar en las causas últimas de la patología bancaria superado la tentación de meramente realizar un análisis epidérmico de los síntomas, como ha sido la tónica en otros libros (con las excepciones de rigor que se quieran poner). En este sentido, el autor no rehúye el planteamiento de ninguna de las cuestiones que resultan clave para dar con los porqués del comportamiento disfuncional generalizado por parte del sistema financiero que desembocó en la grave crisis de 2008.

El tono ligeramente disonante del que fuese antiguo gobernador del Banco de Inglaterra sirve para evidenciar algunas de las diferencias con respecto al diagnóstico que ha dominado la corriente mayoritaria, siendo este más completo y amplio a la hora de abordar las diferentes cuestiones. Seguimos a día de hoy sin contar con un consenso claro y mayoritario sobre cuáles fueron las causas de la última crisis. King se desmarca de las tesis defendidas por otros protagonistas preeminentes de la crisis que se han lanzado a escribir su visión con respecto a la crisis como Ben Bernanke, también Hank Paulson o Tim Gaithner, al remarcar en su análisis la importancia de los propios bancos centrales, y demás elementos de la arquitectura del sistema financiero, como causas fundamentales de la crisis al alimentar la “búsqueda desaforada de retorno” a toda costa por parte de las entidades financieras para compensar así las caídas en la rentabilidad derivadas de las políticas de crédito artificialmente barato por parte de los propios Bancos Centrales. Fueron estas políticas de dinero barato, señala el autor, las que en última instancia favorecieron un escenario de sobre confianza generalizada en los mercados y dieron lugar, entre otras cosas, a un crecimiento desaforado de los balances y una acumulación excesiva de riesgos en el sistema. El autor de El fin de la Alquimia señala acertadamente como este comportamiento hunde sus raíces en la asimetría entre ganancias y pérdidas con la que operan los bancos en donde con respecto a estas últimas, en última instancia, están cubiertas de forma tácita por el contribuyente. Todo esto deriva en un perverso sistema de incentivos que favorece un comportamiento disfuncional en las entidades. Incentivos y asimetrías, advierte el autor, que no han sido corregidas y que no hacen descartable que el conjunto del sistema financiero no vuelva a ser foco de problemas e inestabilidad en un futuro.

La gran conclusión del libro, que quién les escribe comparte plenamente, es que en última instancia la crisis económica ha sido consecuencia de una falla de ideas, de una equivocada comprensión de cómo funciona la economía realmente. Por eso no es de extrañar que la crisis financiera haya reavivado, más que menos, el debate intelectual con respecto a la propia ciencia económica. Se trata de un debate demasiadas veces encorsetado al terreno de juego que establece el Sanedrín académico neoclásico, sobre todo por lo que respecta a las grandes tribunas de pensamiento y grueso de responsables políticos. Suelen ser únicamente unas pocas voces sueltas, ajenas a las círculos de poder académico y a los altos cargos, versos sueltos, las que cuestionan los dogmas siendo categorizadas como heterodoxas de inmediato. Es bueno entender esto para poner el valor este tono disonante de King, un peso pesado dentro del establisment financiero y académico mundial, que pone una interesante nota de color, al demasiadas veces monocroma debate académico mainstream donde las diferencias son siempre de matiz, nunca de grado. Resulta meritorio, por ejemplo, que King aborde con claridad el tema, por otro lado crítico y fundamental, de la protección de los depósitos o el mismo sistema de reserva fraccionada, elementos ausentes en la ecuación de análisis del grueso de economistas y que, sin embargo, resultan piezas imprescindibles si queremos realmente alumbrar un sistema bancario y monetario que favorezca un comportamiento racional por parte de los bancos y permita a las economías crecer de forma sostenible y no de forma burbujeante como hasta ahora.

Se trata de un mensaje con toques contrarian del cual tuvimos algunas muestras en los compases iniciales de la crisis pero que, poco a poco, estas voces fueron quedando ahogadas por lo que fue configurando la sabiduría convencional con respecto a la crisis económica. Ahí esta la hemeroteca para quién la quiera consultar de voces que alertaron de algunos elementos equivocados en el diagnóstico que hizo Washington en los inicios de la crisis como Jean-Claude Tritchet, muy escéptico con respecto al diagnóstico de la situación de 2009 elaborado por la Reserva Federal y que dio pie a los programas de compra de bonos y que ahora tantas dudas despiertan entre amplias capas de analistas e inversores, Wolfang Schäuble, el actual ministro de finanzas alemán, o Axel Webber, antiguo gobernador del Bundesbank. Pese a todo, las tesis de Bernanke y compañía, que podemos resumir como: crisis de liquidez, cíclica debido a fallos de mercado por falta de regulación; se acabaron imponiendo a la visión más Europea de la misma: crisis de solvencia, estructural, cuyo origen se sitúa en las políticas de dinero fácil por parte de los bancos centrales que alimentaron la burbuja especulativa y el crecimiento de la deuda. Al final, con matices, Europa ha ido siguiendo el plan anti-crisis diseñado por Washington. El libro de King, aunque por momentos ecléctico y en donde el autor navega con mucha habilidad por ambas orillas, pone en valor muchos de los aspectos que configuraron en un inicio el grueso del diagnóstico europeo cuando realiza una visión crítica de la salida en falso que ha supuesto, en muchos aspectos, el grueso de medidas monetarias ultra expansivas adoptadas hasta ahora.

En la base de esta divergencia de visiones subyacen distintas maneras de entender como funciona la economía: una más matemática, optimizadora y equilibrista; la otra más humanista, dinámica y articulada alrededor de la acción humana. Ideas falsas, dan lugar a diagnósticos equivocados, y estos a políticas económicas que lejos de arreglar los problemas de raíz meramente alivian síntomas generando nuevas distorsiones, nuevos problemas sin solucionar los viejos, y que, en el mejor de los casos, únicamente generan una prosperidad ilusoria consolidando este escenario de economía burbujeante y de expectativas limitadas al que parece que poco a poco nos hemos ido resignando. El debate sobre el método, es decir de que manera verificamos teorías y extraemos conclusiones, no es nuevo: David Hume ya planteo de forma célebre el problema de inducción a mediados del siglo XVIII, que luego fue reformulado por Popper en el XX, y sofisticado de nuevo por Nassim Taleb en el XXI. La crisis ha subrayado la importancia del mismo ya que, en buena medida, de ello depende que sepamos dar con un diagnóstico acertado y remedios acorde a los males que lastran la confianza y limitan el crecimiento.

Con independencia de las discrepancias que inevitablemente suscitarán al lector muchos de los postulados de King, como le ha sucedido al lector que ahora les escribe –bienvenidos sean los discrepantes si vienen con argumentos–, el libro constituye una contribución de primer orden y de gran valor a la espinosa y difícil cuestión de cómo ordenar la banca y el sistema monetario en el siglo XXI.

Luis Torras

Barcelona, 10 de mayo de 2016

Mervyn King y el futuro del capitalismo“, La Razón, 19 de septiembre de 2016.

Weimar revisited by Edward Chancellor

The spectre of Weimar Republic-like inflation has haunted some fevered minds since central banks revved up their printing presses after the Lehman Brothers bust. No hyperinflation has yet emerged. Still, a milder manifestation of the social malaise which gripped Germany in the early 1920s is becoming evident in the West. Monetary policymakers are urging more extreme actions in their frantic pursuit of higher inflation. They should be careful what they wish for.

Historians agree that the origins of Germany’s post-war inflation lay in the failure of the country’s political classes to make hard choices. The Germans had funded their war effort largely with debt, accompanied by the printing of central-bank money. After the Weimar Republic was established in 1918, inflationary finance continued. Government deficits funded with newly printed marks had the advantage of maintaining employment at high levels and keeping the economy buzzing. As inflation soared, enterprises were able to borrow from the Reichsbank at rates so low that capital was, in effect, free.

This policy had the support of many seemingly reasonable people. Walther Rathenau, the cultured head of the electronics firm AEG and a future foreign minister, suggested in January 1921 that should the economy turn down “we ought to print money a bit faster and start construction works, using the employment these create as a dam against the depression. It is incorrect when people said that printing money was bringing us ruin.”

Rathenau, who was assassinated some 18 months later, lived long enough to change his mind. He later complained of the “delirium of milliards” (a thousand million) after the mark collapsed on the foreign exchanges and prices began escalating out of control. “We are living in a bubble,” observed the chastened politician. “Our companies pay dividends – but in fairy gold. We are eating our own accumulated resources, the result of generations of work of our ancestors.”

John Maynard Keynes agreed with these sentiments. “In the modern world,” wrote Keynes in the Manchester Guardian in the autumn of 1922, “organization is worth more in the long run than material resources.” The printing of paper marks, he continued, had brought temporary economic benefits “at the cost of a ruinous disorganization, both present and future and still to come. (Germany) has confiscated most of the means of livelihood of her educated middle class, the source of her intellectual strength; and the industrial chaos and unemployment, which the end of the inflationary boom seems likely to bring, may disorder the minds of her working class, the source of her political stability.”

The celebrated economist, whose later work gleefully extolled the “euthanasia of the rentier”, turned out to be correct on all points.

One of the curious features of the Weimar inflation was the refusal of the Reichsbank to accept that rising prices resulted from its own money-printing. Rather its president, Rudolf Havenstein, maintained resolutely that the decline of the currency was responsible. Inflation, he claimed, produced a shortage of currency which it was the Reichsbank’s duty to rectify. When it was suggested that the central bank set interest rates too low, Havenstein replied that it wasn’t his duty to make market rates but to follow them. In response to calls that Havenstein change course, he insisted on the central bank’s constitutional independence.

Inflation was difficult to bring under control not merely because the central bank was obtuse and politicians feared the inevitable cost in terms of unemployment and bankruptcies. Rather, once under way, inflation develops its own lobby which is not responsive to reason. The industrialists, who benefited from inflation, only changed their position after the economy and society started falling to pieces during the course of 1923. Another group of beneficiaries, the over-worked printers at the Reichsbank’s presses, even went on strike when a currency stabilization plan was eventually announced.

By the time its currency was stabilized, the real value of Germany’s enormous post-war national debt had shrunk to a fraction of a 1913 gold mark – 35 pfennigs to be exact. According to economist Costantino Bresciani-Turroni, this amounted to the greatest peacetime expropriation in the history of the world. The country’s wealth, writes Frederick Taylor in his gripping account of the Weimar inflation, The Downfall of Money, was “no longer spread evenly among millions but largely coagulated in blobs among the new plutocracy”.

Capital had passed from the slow-witted to opportunists. Speculators, who spent their rapidly amassed fortunes with great ostentation, were bitterly resented. So were foreigners, who bought up properties and shares with hard currency. In January 1923, a government minister called for tighter immigration controls.

Germany’s inflation undermined morals and manners, and fostered corruption. Respect for government and the rule of law declined as prices escalated and social order broke down. Adolf Hitler eagerly exploited the growing rancor in society, inveighing against the money-printing which he claimed had crushed the “decent solid businessman who doesn’t speculate” and turned the country into a “robbers’ state”. The horrors of inflation fed the Germans’ desire for a political strong man.

Modern central bankers like to point out that despite the recent explosion of their balance sheets the much-feared inflation has yet to materialize. Nevertheless, the recent period of ultra-low interest rates has produced conditions which, though less extreme, are eerily reminiscent of the Weimar years.

Once again, an era of negative real interest rates has produced low unemployment and “bubble” prosperity. Powerful interests support the easy-money policy, while central bankers ignore the damage their policies produce. Wealth has been redistributed on a grand scale. The newly rich flaunt it, while those less well-positioned feel squeezed. Rancor runs high in society. Popular sentiment has turned against foreigners.

In several countries the political middle ground is giving way. Firebrand politicians like Donald Trump campaign on promises of national resurrection. Hard choices and substantive economic reforms are invariably avoided. And once again, monetary policymakers, unwittingly invoking the tragic Rathenau, intone that “it is incorrect when people said that printing money was bringing us ruin.”