Ancient Rome
Our brief journey through the history of fiat money begins in the time of ancient Rome. The story of the rise and fall of the Roman Empire offers a wealth of insights. And while the empire’s rise was due to a variety of interesting factors, the reasons for its fall are rather predictable and historically identifiable: significant government overspending, financial greed, an entitlement mentality, and military overextension.
Obviously, the colossal costs of financing the empire’s perpetual state of war, plus its numerous public works projects and entitlement programs, required ever-increasing tax revenues. Over time, many could not bear the increasing tax burden and sought relief through tax evasion. As many sought financial relief by opting to evade their taxes, the empire’s revenues consistently fell short. Instead of making draconian spending cuts, the empire moved to create a stealth tax that no one could hide from: inflation. (As history will demonstrate, a shortfall in government revenue rarely leads to meaningful cuts in public spending.)
While Rome did not use paper money, the empire still provides one of the first pure examples of currency debasement in history. The official currency of the Roman Empire was the denarius, a metal coin composed of 100 percent pure silver. The pure silver content of the Roman denarius remained intact until Emperor Nero came to power. In a.d. 64, Rome suffered a great fire, which required a massive urban rebuilding effort. The immense rebuilding costs required more money than the Roman treasury held in reserves. In order to raise adequate funding for the reconstruction, Nero exacted higher tax revenues from Rome’s provinces.
But Nero did not stop there. In an effort to raise even more money, the maniacal emperor intimidated coin makers at the mint to dilute the silver content in the denarius. To accomplish this, the silver content of the empire’s silver coins was melted down and replaced partially with iron or copper. Similarly, the empire’s gold coins were diluted and partially replaced with copper. Because the dilution of the silver and gold coin content was done in limited amounts, few citizens noticed the new hybrid coins.
As the empire’s financial needs grew, cheaper metals like copper and tin began to replace the gold and silver coins that had once been the empire’s currency. Using these cheaper metals meant that more currency could be produced and the money supply could be artificially expanded. The inflationary pressures caused by the increased supply of currency naturally led to higher prices within the Empire.
In a.d. 301, Emperor Diocletian sought to end the increasing prices through price controls. By issuing the Edict of Prices, Diocletian threatened any and all merchants with the death penalty if their prices went above Rome’s acceptable range.
Through the debasement of the Empire’s currency, the government leaders were able to raise large sums of new money for their pet projects. However, Rome’s flirtation with currency debasement became an obsession. By the end of the Roman Empire, a denarius coin was approximately .02 percent silver and 99.98 percent iron! As the Roman currency continued declining in value, merchants and laborers alike shunned its use.7 The Empire’s failed economic policies, coupled with its widespread currency debasement, eventually led to massive hyperinflation and the fall of the Roman Empire.8
China
Today, China is an economic powerhouse that has gained the attention of savvy investors from around the world. But relatively few know that this Far East nation was the first to develop paper money. The paper notes, known as the Jiaozi, were originated and issued under the Song Dynasty in the 10th century a.d. Ironically, the purpose for introducing the paper currency was to combat inflationary pressures created by an overproduction of iron coins. To counter the declining value of the iron coins, a bank in the Szechuan province began issuing the paper currency in exchange for the devalued coins. Initially, the new paper money system seemed to be successful. However, it did not take long before the monetary authorities began overproducing the paper currency, causing it to decline in value. The currency was eventually abandoned.9
Shortly thereafter, under the Yuan Dynasty, the Chinese attempted another form of paper currency. The Chao, as it was known, lasted for a short time. Its demise came after an extreme overproduction of the currency led to massive hyperinflation.
By the mid-15th century, the Ming Dynasty, apparently unimpressed with the enormous failures caused by their novel monetary experiments, decided this time to completely abandon the use of paper money within the country, choosing instead to return to silver coinage.
France
In 1720, France got a taste of paper money gone awry, thanks in part to Scottish economist John Law and his Mississippi Bubble scheme.
Confronted with massive deficits left to him by his great grandfather (King Louis XIV), King Louis XV was eager to find a way to balance the government’s budget. With the nation teetering on the edge of insolvency, John Law convinced King Louis XV to adopt a paper currency and enforce its usage among the public by making it the only acceptable form of payment for taxes. Soon, the paper money became very popular with the French people. After a few wrong turns economically, including an investment scheme in the Louisiana swamplands, France resorted to overprinting the currency. Within four years of the introduction of paper money into the system, France and its citizens went from being impoverished to being fantastically wealthy (on paper), and then back into poverty again. The paper money experiment conducted by Law and King Louis XV completely destroyed the French economy.
But just one generation later, during the French Revolution, France had apparently forgotten the lessons of the past. In 1791, the nation made yet another attempt at issuing a paper currency called the Assignat. By 1795, just four short years later, as the national inflation rate raged at an alarming 13,000 percent, the Assignat became completely worthless. The French Revolution was eventually brought to an end under the strong leadership of Napoleon Bonaparte. Napoleon re-established a gold-backed monetary system in France to replace its failed paper money system, which led the country into an era of prosperity.
Later, in 1936, France nationalized the Bank of France and removed the gold backing from the French currency. The new fiat paper currency that was introduced became completely worthless just over a decade later.
Weimar Republic (Pre-Hitler Germany)
Our next lesson in the dangers of paper money takes us back to a pre-Hitler Germany. Hyperinflation struck the Weimar Republic of Germany in the post-World War I era of the 1920s. At the Treaty of Versailles, Germany accepted its defeat and was forced to pay war reparations to France. War-torn and humiliated, Germany and its frail economy had little hope of being able to repay its enormous war debts. As Germany’s reparation payments became increasingly inconsistent, France grew impatient.
Determined to make Germany pay, France led a military invasion into the debt-ridden country in January 1923. French and Belgian troops stormed a German industrial area, known as the Ruhr, where Germany was known to hold much of its wealth. Once the Ruhr had been successfully occupied, the German economy faced even further calamity. The German leaders reacted by printing even more of their increasingly worthless paper money, known as the mark, in order to satiate their French overlords. But as the German government continued to print millions of marks to remain solvent, Germany’s citizens began noticing a dramatic increase in their wages. This increase was due to the excess currency that was being created within the system. There are pictures from Germany showing workers being paid with wheelbarrows full of currency. The problem, however, was that the prices of goods and services was growing at a faster rate than wages. For example, in 1922 a loaf of bread cost an average of 160 marks. But by the fall of 1923, the same loaf of bread cost 1,500,000 marks!
As was the case with most nations before them, Germany believed that it could overcome the rising prices by printing even more money. The results, of course, were completely disastrous. Not only did the overproduction