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It’s time to start thinking about inflation

In the year 215 AD, the young Roman Emperor Caracalla, then just 27 years of age, decided to ‘fix’ Rome’s perennial inflation problem by minting a brand new coin.

Caracalla’s predecessors over the previous several decades had ordered an astonishing debasement of Roman currency; the silver content in Rome’s ‘denarius’ coin, for example, was reduced from roughly 85% in the early 150s AD, to less than 50% by the early 200s.

And with the silver content in their currency greatly reduced, government mints cranked out unprecedented quantities of coins.

They spent the money as quickly as they minted it, using the flood of debased coins, for example, to finance endless wars and buy up food supplies for their soldiers.

Needless to say this caused rampant inflation across the empire.

Egypt was a province of Rome at the time, and the one of the Empire’s major agricultural producers. Its local provincial coin, the drachma, had also been heavily debased.

A measure of Egyptian wheat in the early 1st century AD, for example, cost only 8 drachmas. In the third century that same amount of Egyptian wheat cost more than 100,000 drachmas.

Caracalla tried to fix this by simply creating a new coin– the antoniniamis.

It was originally minted with 50% silver content. But the antoniniamis was debased down to just 5% silver within a few decades.

Caracalla’s undisciplined attempt at controlling inflation was about as effective as Venezuela trying to ‘fix’ its hyperinflation by chopping five zeros off its currency.

In fact this same story has been told over and over again throughout history:

Governments who spend too much money almost invariably resort to debasing the currency.

In ancient times, ‘debasement’ meant reducing the gold and silver content in their coins.

In early modern times, it meant printing vast quantities of paper money.

Today, it means creating ‘electronic’ money in the banking system.

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