Forecasting Financial Bubbles (Part 8)
Another episode of strong debasement, which can be compared to the one occurred in the Holy Roman Empire is the one that could have been one of the major causes of the weakening of the Roman Empire, which have brought it to ruin.
In 117 AD, the Roman Empire was at its peak. It covered almost 1.5 billion square times, from the strait of Gibraltar to the door of modern Iraq, with a population of nearly 130 million people.
The empire was built of more than 50’000 miles of roads and its constructions, such as aqueducts and theatres have resisted till nowadays. The social structure of the empire is studied even now and it has been the basis for the construction of the modern society. A question arises: how could such a powerful empire collapse?
The huge expansion of its borders brought to Rome glory and treasures, but also duties and costs. The vastness of its provinces soon became a problem for the central authorities sited in Rome. The bureaucratic machine was costly and hard to maintain since the distances that had to be covered by emissaries were enormous.
Furthermore, the expansionary politics of Rome cost an extraordinary amount not only in terms of soldiers’ salary but even in terms of maintenance costs, which includes the establishment of the Roman social structure to new provinces and the conservation of the new administrative apparatus.
Those costs were way too big to be sustained by the empire and the solution found by the government was to debase the currency. It was a slow and continuous process that lasted almost 200 years, leading to a long-lasting financial crisis that spread over the empire bringing it to ruin.
The currency used in the first 220 years of the empire was the Denarius, it was a coin of dimension similar to that of a modern nickel and its value, equal to the daily pay of a skilled laborer, was made upon a high purity of metal: 4,5 grams of pure silver.
The problem was that the coinage of coins was subjected to the availability of precious metals. Given the finiteness of silver and gold supply, the roman spending was limited to the number of denarii that could be minted. This limit collided with the project of the empire such as wars, expansion or constructions. It was at this stage that they realized that it was possible to reduce the content of silver in the coins, leaving unchanged the nominal value. Through this trick, it was possible to finance the expansionary policies of the empire.
In the graph, we can see the evolution of the silver content of the Roman denarius.
The effects of such a debasement took a long time to manifest, but in the end, the economy of the empire was hit by a great shock in transactions. The trade almost stopped nationwide, they kept going only locally, with the use of barter methods which were inefficient, but at least more accepted than the exchange of a valueless coin.
The effects of this process can be seen in the next graph, which highlights the growth of the nominal value of salaries for the army with respect to the silver content of coinage.
In 265 AD, when the content of silver in the denarius was lower than 0,5%, prices skyrocketed 1000% across the empire.
Administrative, logistical and military costs kept soaring in those ages given the high inflation rate and the Romans found themselves in the situation in which there was no more silver to sustain the empire machine. To this purpose, Rome started increasing the taxes on their population, exasperating the paralysis of the economy.
Hyperinflation, soaring taxes, and worthless money could then be considered as one of the main causes of the ruin of the Roman empire.