The Fall Of Rome, Supply Shortages & Hyperinflation

I received a critical anonymous comment by someone on my 2012 trend report. One particular comment was justified as I made a serious typo talking about a spike in treasury demand but mistakenly said treasury yields. In the context I talked about selling into strength of the spike upwards, but I certainly understand the criticism in that regard.

However, one such criticism was directed at my comments about hyperinflation, that I made suggesting that too much money wasn’t the only factor in hyperinflation, and that confidence was just as important. I am not saying that too much money isn’t a common cause, just that there are other factors.

Even if you consider hyperinflation to only be caused by too much money, there are other things that lead to those policies, such as unfunded liabilities and shortage in government treasury that require debasement or default to pay for, both of which have consequences, but in a republic, the only policy that makes political sense is debasement, as if you default you will probably not be reelected and there will be turmoil and rioting against the establishment.

The definition of hyperinflation is typically “too much money chasing too few supplies”. In a gold standard, if you run out of gold, you are in trouble. In a fiat currency, if you lose confidence you are in trouble.

Rome had no ability to mint coin at will. They did have the ability to mint coin using some lead and silver and gold so I am not going to say there wasn’t debasement. In fact there certainly was.

However, they had several things working against them before their collapse. Romans kept detailed records, so more information is available on Ancient Rome than any other ancient culture.

One such thing working against them was population decline. The ability to produce as a society becomes problematic when half your population dies. As rome sought to expand the empire in wars, many soldiers died. Angered, many barbarian villiagers raided the city, killing civilians as well as stealing supplies. To make matters worse, soldiers brought back the plague.

Here’s a graph I found plotting Rome’s population

The fate of Rome had clearly begun to change direction with the rise in the financial problems during the reign of Marcus Aurelius (161-180AD) when there was a sudden explosion of calamities afflicting the empire. The Parthian war erupted which would prove to be very expensive. And this is when the army spread the plague.

Government workers (Military Soldiers) were promised retirement benefits. The politicians were cheered for providing it and Rome in a free republic was made up of elected representatives.

The surplus left by Antoninus Pius in 161AD of some 2.7 billion denari in the treasury was reduced to a mere 1 million under Commodus by 193AD.

The Germanic tribes began to invade from 160-171AD there were many frontier breaches along the Danube as well as other invasions from different tribes including the attack on Buetica by 14 Moorish rebels in 171AD. There were a number of revolts in this period including a very serious one in Egypt (early 170’s). The Roman currency was not drastically debased until well after this.

There was increasing hunger and plagues during the 3rd century that devastated Rome as barbarian invasions began bringing a new gene pool. This hit the rural slave population the hardest, contributing to the further depletion of the slave labor force. Between 180AD and 280AD, Rome’s population probably declined by at least 30 percent. This contributed to the contraction of agricultural labor that was the largest economic sector, which became the single most important cause of declining economic trend behind the Roman economy. The economic crisis had tremendous impact causing enormous suffering for ordinary Romans. This lead to shortages, and required greater expenses by the government as supplies were more scarce, which with the treasury greatly reduced at this time, required great amounts of debasement. It was the shortages of supplies, including the government’s treasury that lead to the debasement, not the other way around.

It was the combination of the promises made by politicians that could not be kept, the decline of the labor force, and the rising costs of military that lead to shortages of government treasury. The government had very little choice at this point but to mint coin, employ aggressive taxation and make promises it couldn’t keep without currency debasement, or default to keep the republic going for a longer period of time. If they defaulted, it was possible the military themselves would turn on the leaders. The “inflation” was only done as a result of there not being enough and money not going far enough because of shortages. This was the result only because of aggressive military expansion and the use of a slave labor force in the race to economic expansion and military conquest.

It is not as if the choice of currency debasement was made in isolation. The expenses of war and military expansion rather than cultural expansion lead to supply shortages, and economic shortages. It was only when Rome was near bankrupt and supplies were scarce that they attempted to print their own money, and not much had to be printed to contribute to hyperinflation as the labor force had died and supplies were in very short supply. People were not going to give up their food when it was scarce and the famines existed for any price.

Similarly in the US, government official sought reelection by spending the nation’s treasury and making promises that could not be financed, and the combination of unfinanced promises and military expenses got to be too much and the only way to maintain some of the power of the US was to turn on it’s bondholders via the closing of the gold window. The government owed far more gold than they had in it’s reserves at the current price, not to mention the growing number of unfunded liabilities. The possibility existed for a run on the government’s gold via exchanging the debt payments for gold from the US treasury, (somewhat similar to what happened during a run on the banks in the great depression only the US treasury was the bank). To protect the nation’s gold reserves Nixon granted the treasury the ability to debase the currency at will, even though it was supposed to be “temporary”.

The one downfall of a republic (elected representatives) is that elected government officials will make promises we can’t keep as long as they are allowed to, and that means eventually even under a gold standard, we will be forced to go off of it like Nixon did at some point unless there are limits on how much government can spend and how much unfunded liabilities they can create. That is not a criticism of a free republic, but instead the lack of us to recognize the problems of history and guard against them.

Hyperinflation occurs when people don’t trust the currency. Even when there is a fixed amount of currency, eventually there is a tipping point that occurs if too much spending is done. The printing money is only done after the government comes up short on cash and decides to debase the currency. It is the supply shortages and debasement of currency that result from the unsustainable policy of promising what cannot be delivered as an alternative to default. If the government were to instead default on it’s promises, and (globally) no one bought their debt as a result or wanted their currency, I believe the currency would not be accepted internationally and be worth closer to it’s intrinsic value (in this case, the melting value of gold per ounce, in the case of paper money the value of using it as paper), and it’s value would likely still be diminished, even if no additional printing were done.

If they create a new currency instead, and the old currency fell out of favor and was accepted by fewer and fewer people, even if the currency was burned so there was very little of it left, without the public confidence and usage, it would become a very inelastic market where the very few amount of people who trade it determine the price. Like a rare piece of art, it can be worth quite a bit as a collectors item and antique, or very little if it’s not a historic piece of art and not appealing to the buyer’s tastes, depending upon the value the relatively few people give it.

Certainly debasement of a currency has a tendency to cause a loss in confidence but blaming too much money on the problem I feel is not looking closely enough at the root causes, which is government’s mismanagement of the money supply, war policies that lead to supply shortages, and government unfunded liabilities.

Regardless, although it certainly could be a significant factor, with all due respect I believe it is fallacy to assume that the only factor on whether there is high inflation is the supply of money, and that the precursor to “too much money” is “too many promises” or money and/or supply shortages.

If you think differently, unless you can show me evidence otherwise, we will have to agree to disagree at this point.

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