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The dollar meltdown and ancient Rome

01/31/2008

By Matthew Jarosinski

Nothing can do more damage to society than gradual debasement of its currency. A slow, long-term trend can spiral the economy into an irreversible collapse. Today the connection between a weak dollar, inflation and recession is too clear to keep ignoring. The Fed struggles to provide liquidity and stimulate consumer demand by lowering the interest rates, which weakens the dollar. And Washington came up with emergency fiscal stimulus package, which will also weaken the currency. Yet, Washington and the Fed's chairman, Ben Bernanke, claim that the economic fundamentals are healthy. And it would have appeared outrageous to them to hear that America could be entering not on a period of economic slowdown but on a period of the inescapable decay.

There is the widely held view today that government should run a huge support system, modestly called "social safety net." Such function of government shifts permanently the real resources required to maintain stable currency. Today the policy aims at containing inflation below five percent p.a. It means that the dollar earned today will lose half of its purchasing power in some 12 years. Such gradual currency's depreciation will vastly increase the demand for future aid. It will sink the purchasing power of the dollar even further and spiral the economy into stagflation. The middle class and especially the low income families will face tragic consequences of such political masquerade. Yet, today we view five percent inflation rate as "normal." O mores, o tempores! In 1971 Richard Nixon imposed wage and price controls because the inflation rate was approaching a shocking five percent. One is tempted to call attention to the fact that this "modern" problem created unsolvable conundrum for ancient Rome some 20 centuries ago. In 1939 historian H.J. Haskell wrote a book that implies that the fall of Rome was caused not by the mere shift from a labor economy to a slave economy but by decades of high inflation.
 
The flow of events in ancient Rome seems, at times, to follow our own experience. In Rome property was protected and trade routes made safe. The money came into general use with growing velocity of circulation. The largely barter economy was replaced by economy run on money. The banks offered long-term loans. Checking and saving accounts, bills of exchange and letters of credit were in use. The government intervened into financial market by setting interest rates. Roman coin, the denarius, became the world's currency and for several centuries Rome provided the world with a sound monetary system and became the banking center and the clearinghouse of the world. "The credit of the Roman money market," said Cicero in one of his speeches, "is intimately bound up with the prosperity of Asia; a disaster cannot occur there without shaking our credit to its foundations." The thriving trade brought prosperity but also, a byproduct of expanding economy, an income inequality. Large-scale commercial farming replaced small farms. Government tried in vain to reestablish small farms, but at the end it resolved to temporary relief programs. It also spent large sums on non-productive public projects. Excessive taxation and episodes of high inflation followed. The lack of financial records doesn't help to assess impact of inflation on the cost of living and cost of production but it had to be considerable taking into consideration that massive "offshoring" and "outsourcing" of production to the provinces took place.
   
Globalization, as we would call it today, became a mega trend shaping all other developments. Rome's export fell while import from the provinces to Rome, the consumer center of the world, dramatically increased. The world's labor force had been integrated into the Roman economy. It had depressed the wages and increased income disparities. Globalization created fast economic growth, but the enormous financial wealth that flowed was accumulated in the hands of a few. In Rome financial speculation and real estate investments, induced by easy credits, became the main source of wealth. One may assume that with growing property values the assets and households net worth grew. Yet, easy credit and property speculation produced bubbles. Moreover high taxation led to financial strain. The loans were called up and real estate values collapsed. The panic arose. "The government acted vigorously," Haskell wrote, "and the leading financier Q. Considius came up with a one-time stimulus package of about $1 billion and extended credit at low rates. The combined action of government and a financier alloyed a panic." It did not help economy much and the real cause of the trouble was not addressed. The indebtedness grew and Cicero wrote about that period that "at no time was the world so heavily involved in debt." There were attempts to "solve" the problem by devaluating the currency but not by stopping overspending and Rome continued to consume more than it had produced. As the government kept running and spending a "perpetual deficit," heavy taxation and inflation further undermined the middle class -- the backbone of the Empire. Finally Rome had developed economic problems which, as one historian said, "It did not understand and for which solution it had no technique."

In the end, government adopted Keynesian measures to help the economy; it began what historians called "an orgy of spending." The civil service was greatly expanded and made more expensive. Large sums were put into public projects. Public funding of private schools had increased enormously. The local governments in the provinces also began to spend a disproportionate part of their revenues. An estimated half of the population was employed by the government. This unproductive spending only led the government into more inflationary spending. The Rome's denarius sank and the debauched currency paralyzed a once very mobile economy.  
The Republic had in fact "crossed Rubicon" when Gaius Gracchus transformed the public relief emergency measures into a permanent support system. The idea that the state should tax middle class in order to help the less fortunate on a permanent basis became a political credo and a basis for all future legislations. From then on, the electorate would elect whoever seemed to offer the greater inducements. For a while the idea seemed to work. But this widely accepted view prevented Rome from putting a cap on government spending -- the main cause of destructive inflation.
 
Anyone who is not shocked by the history of Rome has not understood it. A permanent government spending on programs directed at promoting the welfare of the poor proved economically destabilizing. Emergency relief is necessary. But permanent massive spending masks a pending tsunami. It adds, over time, immensely to the demand for more aid, which subsequently inflicts dangerous currency depreciation. The debased currency makes it impossible for the people to break the vicious circle of dependency and government patronage becomes essential. In the end the government cannot avoid having significant inferior effects on the economy and has no choice but to attempt to cure the problem with the socialistic regimentation of the totalitarian state -- a road to serfdom.

The modern world has far greater resources than the Roman Empire. Technological progress promotes the productivity growth. The sources of liquidity are far greater. The private sector still dominates the national economy. It is quite impossible to draw conclusion from the Roman experience as to the limits of government spending. But the costly programs funded through national debt create an inflationary environment and threatens the economic stability of the United States. Recently, it has been argued that economic expansion shouldn't be jeopardized by cuts in governmental expenditures and that we need instead to increase taxes. This view prevents us from putting a cap on government spending. As Rome's experience shows, the permanent huge government spending is in itself the main source of economic instability. It makes matters worse because prices are likely to rise and a permanent inflation does the rest. Today, as the government spending keeps growing as the share of national economy it is time to start worrying because no society is on stable foundation when its currency is debauched.

Jarosinski lives in Waitsfield.
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