The fall and rebirth of money

Links between monetary debasement and inflation: from causes to consequences

History of Coinage

Links between monetary debasement and inflation: from causes to consequences

This section looks at the links between monetary debasement and inflation, from causes to consequences. Monetary debasement is one of the major economic phenomena in Roman monetary history, with direct effects on inflation. From the 1st century AD, there was an initial slow phase of debasement of silver coinage (denarius) from the reign of Nero (54-68 AD) onwards, accelerated by repeated military and financial crises, notably under Septimius Severus (193-211) and Gallienus (253-268).

A more gradual devaluation of the aureus is also noted. This difference in the rate of devaluation highlights two points:

The role of the unit of account in bimetallism for state control of money. The unit of account in this example is the denarius. There are three distinct methods of managing the value of the unit of account evident in this period: devaluation (debasement of the metal), redenomination (antoninianus) and the imposition of a face value by marking "XXI" (Aurelian)
The State's desire to postpone as long as possible the devaluation of the aureus, the reserve of value that enables the elite to maintain their purchasing power at the expense of the less fortunate. We will frequently revisit this principle throughout the course, especially in connection with the concept known as the "Cantillon effect" and the redenominations of the Maravedi in Spain.

This phenomenon has recurred throughout history and is evident with all reserve currencies. The reserve unit of value, such as the aureus in Rome, remains stable, while the unit of account used by the general population for trade and everyday transactions is often devalued. As a result, monetary inflation disproportionately affects the common people, while those who can afford gold coins remain largely unaffected.

This dynamic is also present in modern economies, where currency devaluation can increase the value of financial assets. As a result, individuals who transact primarily in the currency—often the least wealthy—see their purchasing power decline. Conversely, those with the means to hold assets that appreciate during inflation can protect and even grow their wealth, a process that deepens social inequalities.

The mechanism described here is known as the Cantillon effect. Richard Cantillon was an economist who lived in the time of John Law, a subject we will also cover in a subsequent section.

The reform initiated during Aurelian's reign allowed inflation to soar. Inflation in the face value of money was no longer limited by the mints' ability to produce coins by hand. Coins that had already been minted could now be simply marked, and the nominal value of the money supply increased more rapidly.

Two quotes from historical texts illustrate the impact of Aurelian's reform. The first comes from A History of Money: From Ancient Times to the Present Day:

"as far as the Roman economy is concerned, Aurelian's contribution was more of a disaster than a triumph. It was largely due to the nature of his "reform" that the rate of inflation was able to increase far beyond what had previously been possible, even under the irresponsible Gallienus. For two centuries after Aurelian, inflation became endemic throughout the Roman Empire "

The second comes from the book Ancient History from Coins and concerns the detachment of the monetary system from gold:

"Aurelian's reform changed the relationship between gold money and the rest of the monetary system. Before it, other types of currency were linked to the aureus according to official rates (25 Egyptian denarii or 25 tetradrachms for one aureus, etc.). After the reform, gold money began to fluctuate freely in value, like any other commodity, while the rest of the monetary system collapsed in value due to the weakening of alloys, no longer being backed by gold. As the unit of account remained theoretically based on silver (the denarius, or in Egypt the drachma), prices rose as the currency depreciated. "

As these quotes illustrate, the devaluation of the currency that served as a unit of account disproportionately affected the less well-off, while the detachment of the link with gold money protected the purchasing power of those who could afford to save in the store of value that is gold.

The critical change in Aurelian's reform was the severing of the fixed exchange rate between the denarius and the aureus. Previously, even as the denarius was devalued, it could still be exchanged for aureus at the official rate (25 denarius for 1 aureus). This created an incentive to exchange overvalued silver for undervalued gold. By removing this link, Aurelian prevented this exchange. So people could no longer exchange denarii for silver metal devalued against gold. Those who held gold coins could now protect their wealth, as devalued silver could no longer be traded for pure gold at a favorable state-mandated rate. This marks a pivotal moment in the evolution of currency.

A striking example of the effects of this reform by Aurelian is perfectly illustrated by these quotes from the book Monetary Regimes and Inflation:

"Between the reigns of the emperors Claudius (41-54 AD) and Constantius (337-361 AD), the price of wheat on the open market in Egypt, expressed in drachmas, increased by a factor of over a million. Spectacular price inflation is one of the central economic facts of the 3rd and 4th centuries AD" (Lendon 1990, p. 106). But this development is less dramatic than it seems, as it corresponds to an average annual inflation rate of 4.4%. And according to Wassink (1991, p. 482), inflation actually began only in 238 AD"

"From this date onwards, inflation slowly accelerated, as good money was first driven out of circulation, so that the total money supply hardly increased at all at first. Subsequently, it reached an average annual rate of 3.65% between 250 and 293, rising to 22.28% between 293 and 301 (Wassink 1991, p. 466), i.e., up to the aborted monetary reforms of Emperor Diocletian. This phenomenon is particularly impressive for inflation under a commodity-money regime. "

This phenomenon of inflation linked to monetary debasement initially responded to the occasional cash crises of the Roman state. By reducing the precious metal content of coins while maintaining their face value, the state temporarily increased its resources. But prices did not react immediately: indeed, the Roman system had a certain stickiness, which meant that wages and prices were slow to adapt to successive devaluations. Nevertheless, after a certain threshold, prices would rise sharply to bring the market back into balance with the real value of the currencies.

As mentioned above, this phenomenon is particularly evident from the middle of the 3rd century onwards. In Egypt, a richly documented region, prices were multiplied by 10 under Aurelian (274 AD) after an official revaluation of the currency, despite an initial attempt at stabilization. Then, under Diocletian (301 AD), the price edict imposed drastic controls to curb inflation without tackling the root cause - overproduction and monetary degradation - thus causing a predictable failure. Persistent inflation ultimately pushes the economy towards a two-tier system: the elite, protected by gold reserves (like Constantine's solidus), enjoy stability, while the majority of the population continues to suffer chronic inflation, illustrating what is known today as the Cantillon effect.

There is a clear link between Roman monetary debasement and inflation, the causes of which are essentially linked to chronic fiscal deficits, incessant military spending, and poor state economic management.