How Currency and Market Manipulation Destroyed the Roman Empire

We Austrian / free-marketing types usually rave pretty aggressively about the economic (and thus entirely human) ills caused by excessive market manipulation (usually through direct command, subsidy, government spending, etc) and currency manipulation (usually through printing and credit expansion).

(Hey by the way: if you don't know much about topics like credit expansion and what it does, I'm going to be working longer-term on some "Explain Like I'm Five" pictograms or videos to try to simplify how it all works for everyone.)

While more sophisticated forms of these tend to cause problems that are Depression-sized rather than collapse-of-civilization-sized, these kinds of manipulations have negative consequences and fundamentally must have negative consequences. I'll talk about this somewhat staggering claim of inevitability in another post.

But for now, I want to talk about the really heartbreaking case of the collapse of the Roman Empire. It's a case of these manipulative activities being undertaken before anyone understood enough economics to really have a good coherent policy, much less understand the consequences. The point of this is to show a decisive example of this manipulation totally annihilating the greatest empire that ever lived, and hopefully teach us a few lessons that we'll see come back when we discuss the Great Depression and Great Recession of the late 2000's, as well as the Staglfation of the 70's.

I know most of my Roman history by listening to the venerable Mike Duncan of the History of Rome podcast. I highly recommend it, by the way--Duncan is sharp, engaging, accurate, and has a wonderfully dry sense of humor. Also you learn a lot. I'll note here that Duncan is not a free-marketeer like myself (in fact I believe he sortof betrays his more left-y ideologies in some of his social commentary), as to assert the more-or-less neutrality of my source. But note he is basically my one major source, and the rest of it is poking around on Wikipedia, so I'm sure you Roman history PhDs will find a few inaccuracies. Let me know and then go argue with Duncan.

Anyway.

Rome printed coins, which was awesome. Bartering is terribly inefficient and essentially prevents any sort of growth of prosperity (and really limits what you have access to). Currency is one of the best things that ever happened to mankind. Rome also had private property rights and a pretty darn free market. It's just really hard to have lots of economic regulation on a giant empire, especially when you have boats criss-crossing the Mediterranean. There were taxes and tariffs, but people were generally free to buy/make/sell what they wanted and pay people what was negotiated between them. This, of course, made the Romans fairly rich. (I'll admit, before anyone calls me on it, that the Romans had pretty high inequality in their Golden Age, too. But their poorest were a lot richer than most everyone of the rest of the world, and the inequality was way less bad than many of the more royally-commanded economies of the time.)

The tough part about printed money is that you can just keep making more of it (keep this in mind as we start talking about the Federal Reserve), without actually expanding the amount of resources available. When we print a lot of money, we start to get inflation--if you suddenly double the amount of money everyone has (without changing the amount of stuff/labor available), things will just cost twice as much. 

Sounds like it's not a big deal, but when inflation is fast, lots of bad things happen. Germany (in WWII), Venezuela (recently), and Zimbabwe (90's) have seen hyper-inflation from printing money too quickly. When that happens, you can't hold on to any money / save any of it, because it will be worth much less very soon. This generally means people also don't want to sell their stuff for cash, because the cash they get for their stuff will soon be worthless, where the stuff doesn't really lose value. Of course nobody will give loans at all, because when they get paid back, the money's now totally worthless. So you really can't start any new ventures. The economy grinds to a halt and, like we see in all these historical cases, people literally start starving to death. All because we printed too much money.

So this rapid inflation is really, really bad. Just freakin' terrible. And remember it comes from printing way too much money. This is even worse in older economies, by the way, because it takes a lot of time for that new money to show up, so prices go up before people even get that new currency to spend on it.

So that's what the Roman government just did, of course. They started doing it to pay the army, which was growing and extorting the later Republic for continually-increasing wages. So they started printing more coinage, and then realized that they could just reduce the amount of gold and silver in the coinage (most of this happened under Nero; later emperors extended it but not by much), and simply declare the new money is worth as much as the older, gold-rich money.

That is, of course, just silly to believe will work.

The problem of inflation started gradually, but when it got bad, it got really bad really quickly. Part of the problem was that nobody knew for sure why it was happening. When prices went up (which was a mystery), the Roman government started printing even more money with in order to try to alleviate the problem and get more money into people's hands, but this of course made things worse.

So you had crazy-rapid inflation. People started starving. The poor started having to give up their plots of land because they were broke, and land started to consolidate into the hands of the wealthiest. 

Finally a few smarties in Rome (around the time of Aurelian, like 270AD or so) got the message--partway. They restored the level of gold/silver in the coinage and tried to scoop up old coins to get them the heck out of circulation. But they kept printing. The Roman economy was collapsing, and oh-by-the-way the gigantic army they had (to deal with all those Goths being displaced by the advancing Huns) were demanding more money all the time, because their wages kept buying less and less stuff. Because the economy was crap, they couldn't use taxes to pay the army, and so they kept printing to do it.

Just a super-vicious cycle here (getting to its worst in the 3rd century). This economic collapse was part of why we had Brittania and Gaul (France) and Spain declaring independence and trying to set up their own economies. It came at a particularly bad time, as those aforementioned Goths were starting to really beat the snot out of the Romans and ran around plundering what was left of the economy.

Anyway.

284 AD, enter Diocletian, the guy whose well-intentioned attempts to take over the economy put the final nail in the coffin and set the stage for feudalism and the dark ages. The guy ruled for 21 years, which was a pretty bloody long time for the age, and in that time screwed up a lot of stuff. 

Diocletian, who is responsible for such insane amounts of bureaucracy that he brought about the adjective "Byzantine" to refer to something overly-complicated.

So what'd Diocletian do?

First, he started imposing price controls. This is a common tactic in high-inflation situations and, of course, always backfires in a lot of ways. Diocletian created a massive bureaucracy to determine empire-wide prices of everything, from pigs to grain to boats to shoes to forks. I mean, freakin' everything.

He made it law for this to be imposed everywhere, but of course it was really not being enforced in private trade. But since provincial governments were the biggest customers of just-about-everything, it meant that a lot of stuff was sold to the government at way-below-market-value, and those people had to turn around with paltry money and try to buy other stuff at market rates. This caused even more starvation and whatnot.

A well-known (and terrible) secondary effect of price controls is shortages of everything being price-controlled: if it's not profitable to make it, people stop making it. So economic activity ground down even further.

Yet another impact of this policy was that money became even more worthless. It was so bad and so rapid that the government started taxing people "in kind"--that is, taking chickens and nails and cut rocks and even services like distance of transport of goods rather than cash, in order to hopefully get the right proportion of goods they needed for the year, but that of course failed miserably. The government got way too much of some stuff (which now sat totally idle as waste) and not nearly enough of other stuff, which meant Roman troops were running around without stuff like shirts and shoes.

Another truly fascinating effect of this extensive price-control was that people started ditching industries wholesale. If we imagine there's a "correct" market price for something, everyone's goods were under-priced. But some of them were more underpriced, and some of them were less underpriced--a central authority just can't set perfectly-proportional prices, especially over an empire.

So let's imagine that in the free market, a pig is worth 100 denarii and a chicken is worth 25 denarii. A pig is worth 4x a chicken.

Knowing that Diocletian's policy had to be at least a little inaccurate, we can imagine that pigs maybe dropped to 10 denarii and chickens to 4 denarii. This means that pigs are now only 2.5x the value of a chicken. Chickens have become comparatively more valuable. So pig farmers started ditching pigs and moving to chickens, which meant you had pig shortages.

So you can imagine all sorts of goods or services (particularly transport of goods, as it turned out, which as you can imagine is particularly bad) just drying up completely, and others becoming excessively common.

So Diocletian had a great plan for this. In order to keep these industries from collapsing, he made pretty much every single industry into a "Guild," like a shipbuilder's guild or a grain-growers guild or a baker's guild. I mean, everything. And by "Guild," I literally mean that if your dad was a grain farmer, you were bound by law to be a grain farmer. Period, end of story, unless you want to go to jail.

So lots of folks in these massively under-valued industries were forced to keep working in them, and went broke and starved. I mean, Ayn Rand's dystopian fantasy in Atlas Shrugged really pales in comparison to just how awful this is.

Most people that didn't starve had to sell off their assets to a rich person and then go work for that rich person to survive, as that rich person could at least feed and shelter them. So these rich folks collected even more property and also, critically, collected lots of incredibly cheap labor that had absolutely no ability to ever leave, as they never got cash and legally were not allowed to get into a new industry.

Sound familiar? It should: it's serfdom. Under Diocletian--in 21 short years--the Roman economy went from its phase of a totally-messed-up-hyper-inflating market economy to a feudal economy in which the majority of the population was locked in legal serf bondage to either the government or to very wealthy land-owners.

Eventually, these land-owners had so many people under their rule that for purely practical purposes (after the Roman empire totally blew apart in the 400's), the local kings of the new mini-kingdoms just gave these guys legal powers, turning their lands into feifdoms and them into barons/lords/whatever.

After that, it was only further downhill. Food shortages and starvation became the norm, in a time when the army needed to be bigger than ever. Wealthy land-owners started hiding their cheap labor so it wouldn't be recruited away, so now the army was not only short on material, but it was even shorter on manpower beyond the effect of the starving/dwindling population.

And that's essentially how the Roman empire ended--the army couldn't get what it needed (men or materials) to defend against the encroaching Goths, and by the 400's they were doing whatever they wanted. Rome ended pathetically poor after this process of rapid inflation, price control, command economy, and then serfdom killed its productive capacity. Obviously a lot was involved in the collapse of the Roman (Western Roman, really) Empire. I feel passionately that the Romans would have weathered many of these storms (as they had so often before--Rome's many burnings, wars that almost depleted the empire, plagues and famines, etc) had their economy and population not been a gutted husk of its former self.

When it was gone, the money was abandoned entirely for a while, and the economy shrunk further as people reverted to bartering.

It makes the latter episodes of Duncan's "History of Rome" really, really depressing. Just to show how Duncan and I don't quite see eye-to-eye on this, he rates Diocletian as one of his top 5 emperors. I think Diocletian is in my bottom 5 for total impact--Nero may have played the fiddle as the city of Rome burned, but Diocletian played the puppeteer as he turned the entire empire to ashes. All from the well-intentioned notion that the government can take over failing parts of the economy and save them, rather than make them worse.

Dear reader, think about how this example applies to the examples of Germany in WWII, Zimbabwe in the 1990's, Venezuela in the 2000's.

Remember this story well. We'll talk about it when we get to the Great Depression, where I'll thankfully have loads more data about how money-printing and credit expansion caused the stock market collapse, and then how FDR's well-intentioned command of the economy prevented the market from getting back on track until well after WWII was over.