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From Silver Denarii to Gold Solidus

Decline, fall and recovery, Roman-style...

The LAST emperor of Rome's Golden Age, Marcus Aurelius (161-180 AD) struggled to maintain the low tax and stable money principles of Augustus, writes Nathan Lewis of New World Economics in this excerpt from his upcoming book, The Magic Formula.

Nero had reduced the silver content of the Denarius from 100% to 90% in 64 AD; this may have been in response to expenses following the Great Fire of Rome that year. Trajan (98-117) reduced the Denarius to 85% silver, possibly an adjustment to match official bimetallic conversion rates to the market prices of gold and silver.

During the peaceful reign of Marcus Aurelius' adoptive father, Antoninus Pius, the state treasury had built up a reserve of 675 million Denarii (equivalent to 197,000 kilograms of gold). A series of invasions by German barbarians incited a long war during Marcus' reign that exhausted this sum. In Rome itself, several plagues (possibly smallpox or measles) broke out, causing up to 2,000 deaths a day in the capital. Total deaths have been estimated as high as five million, and the military was devastated.

In a time when government debt finance did not exist, this left raising taxes, selling assets and debasing the coinage as ready alternatives. In an effort to avoid raising taxes, Marcus sold even his own personal assets to fund the state. As this avenue was eventually exhausted, he debased the coinage to 75% silver. After eight years encamped on the battlefield, Marcus finally returned to Rome victorious.

By itself, this was not particularly troublesome. But the demands of the time strained the abilities of one of the finest leaders that Rome, or any other country, had ever seen.

With every narrator, the story of the Fall of Rome begins with his son and successor, Commodus, who was rotten. "Entirely absorbed in himself, he spent his life in continuous debauchery, and in gratifying his morbid passion for the gladiator's art," described historian Michael Rostovtzeff.

"Administration and military affairs were neglected; he relied entirely upon the praetorian guards, and was hardly at all in touch with the provincial armies."

Commodus did not raise official tax rates, but the fiscal difficulties of the state, colored with personal avarice, prompted him to use every pretense to confiscate property.

"Though every measure of injustice and extortion had been adopted, which could collect the property of the subject into the coffers of the prince; the rapaciousness of Commodus had been so very inadequate to his extravagance, that, upon his death, no more than eight thousand Pounds were found in the exhausted treasury," described historian Edward Gibbon.

This produced a strong opposition among Rome's wealthy aristocracy, to which Commodus responded by executing his opponents and confiscating their estates. The assassination of Commodus in 192 began a civil war, the "year of the five emperors", resolved when Septimus Severus, a general in command of an army on the German frontier, marched his army into Rome and seized the throne.

For nearly a century afterwards, the empire convulsed as a series of generals or military-appointed emperors came to power via civil war. Between 192 and the reign of Diocletian beginning in 284, Rome had 32 emperors. Many did not last a year, or escape the cursed throne with their lives.

Septimus Severus (193-211) debased the Denarius to 50% silver. By 250, it was down to 40%. Then, the Denarius collapsed. In 270, the silver content of the Denarius had been reduced to 4%, and the price of wheat had risen by twenty times since 200. Further devaluation of the coinage came about by issuing copper coins with larger and larger denominations. By 314, the nominal price of wheat was another 50 times higher than in 270.

The military itself, now dominant in all affairs, naturally attracted new aspirants. It at least doubled in size. In their struggle to obtain and hold power, the emperors installed by the military needed money, and to get this, taxes rose. Eventually, the government refused to accept its own coinage, as did the soldiers themselves, and taxation was paid in kind.

As the military became both the foundation of all state power, and also the defense against foreign invaders, sustenance of the military became the primary concern. To accomplish this, the military simply took by force what it wanted and needed from whoever was at hand. Economic activity collapsed, which made the military's demands, in comparison to meager production, all the more burdensome. The borders of the Empire shrank under the pressure of foreign invasion, and whole regions, particularly along the German border in Dacia, were pillaged and lost.

Diocletian (284-305) halted the chaos of Rome's collapse, ruling for twenty-one years and retiring peacefully afterwards to an estate on the Adriatic. The administration of the whole empire was reorganized. Diocletian attempted to reform the coinage and stabilize prices, necessary for a return to a monetary marked-based economy, but this was sadly unsuccessful. In response, he rationalized the system that was effectively already in place, in which taxation was paid in kind to meet the material requirements of the military.

The result resembled the centrally-planned communism of the Soviet Union. The military's needs in terms of grain, cloth, oil, weapons and so forth were calculated, and this requirement was divided among the empire's regions. The overall result was positive: farmers and other producers knew their fixed obligations, and were less subject to arbitrary pillage by armed forces. But this required a huge bureaucracy, which also needed to be supported. (The military and bureaucracy were tax-free.)

Michael Rostovtzeff described:

"Compared with the delicate and complicated system of the early Empire, in which stress was laid on the self-government of the cities,...the system of the late Empire, despite its apparent complexity, was much simpler, much more primitive, and infinitely more brutal. ...[T]he bureaucracy gradually became utterly corrupt and dishonest and at the same time comparatively inefficient....Every addition to the army of officials, every addition to the host of supervisors, served to increase the number of those who lived on bribery and corruption."

As private enterprise became difficult or impossible, a popular path to wealth was to become a tax collector, a position that could be abused for private gain.

Tax payments were encouraged by public torture; wives and children were made to give evidence against their husbands and fathers; obligations were increased by adding old men and children to the tax rolls. Even before such extortion, the tax collectors' authorized fees amounted to possibly a quarter of all revenue. Emperors declared that abusive tax collectors would be burned alive, but this did not deter them much.

In time, to maintain the system and prevent people from fleeing their obligations, people were tied to their land, homes, professions and places of employment, with sons eventually taking the place of their fathers. The coinage continued to be devalued, for anyone who would still take it in trade. In 344, the price of wheat had risen another two hundred times since 314, but this had become largely irrelevant.

"The resources of the farmers were exhausted by the outrageous burdens of all the taxes, the fields were abandoned, and cultivated land reverted to waste," lamented the historian Lactantius (250-325). In the next fifty years, taxation on farmers doubled again. In some regions, a third to a half of all arable land was left uncultivated. Mothers sold their children into slavery, and fathers prostituted their daughters, to pay the taxman. A significant decline in population has been attributed to malnutrition.

If they did not abandon the fields altogether, small farmers would transfer ownership of their fields to large landowners, and continue as tenants or slaves (slaves paid no taxes). Large landowners, by legal or illegal means, had enough influence to avoid taxes – the tax collector, if he did not accept his bribe, could appear at the fortified villa and make his requests politely to the landowner's armed paramilitary.

The self-sufficient manorial estate, manned by hundreds or thousands of serfs, capable of its own self-defense, requiring no money and little outside trade, became the primary economic unit, and remained so throughout the Middle Ages. Effectively free of taxes, they often became quite prosperous, even opulent, while the State was destitute. As the landowning aristocracy avoided taxes, demands fell ever more heavily on those that remained within the state's grip. The cities decayed, and many nearly disappeared. Masses of peasants fled to the lands of the barbarians.

Rome was invaded by the Visigoths in 410, and by the Vandals in 455 – a passel of ruffians that could never have challenged the military in its prime. In 472, Rome was sacked by an unpaid Roman army, itself largely composed of barbarians. When Rome finally fell to the barbarian Odoacer in 476, it was not missed much. As long-term rulers, rather than short-term invaders, the barbarians were far less oppressive than the Roman state. In the vacuum of Roman collapse, new kingdoms emerged. In Gaul, the Merovingian dynasty (481-751) was followed by the Carolingian Empire (751-843), which unified much of Europe in the Holy Roman Empire.

While the Roman empire collapsed in the west, a new empire formed in the east. The emperor Constantine (306-337) established his capital at the ancient Greek city of Byzantium, renamed Constantinople, in 330. He also introduced a new coin, the Solidus, of 4.5 grams of pure gold.

The Solidus formed the basis of a new monetary system, which allowed the monetary market economy to revive. When it was introduced, it had a market value of 275,000 Denarii. Perhaps the Romans had learned their lesson regarding monetary stability, for this coin continued to be issued from Constantinople, unchanged, for over seven hundred years afterwards.

Roman paganism was abandoned, and Christianity became the official state religion. In arts and design, Greek classicism gave way to Persian opulence. High taxes persisted, but governments began to feel their way out of the morass. Julian (361-363) reduced taxes substantially, declaring at one point that he would "rather lose his life" than raise taxes. Anastasius I (491-518) undertook a comprehensive reform of the tax system, and introduced a new, high-quality copper coin, the Follis, to be used alongside the Solidus and replace the small-denomination junk coinage then in use. (The name Follis originally referred to a sack of coins worth 25,000 Denarii.)

Only a few years after the West had disintegrated into barbarism, the Eastern Roman Empire, now known as the Byzantine Empire, was so prosperous that Anastasius ended his reign with an enormous 150,000 kilograms of gold in his treasury. By 565, the Byzantine Empire had reconquered Rome and all of Italy. The Byzantine Empire continued another thousand years after the fall of Rome in the West, and ended with the conquest of Constantinople by the Ottoman Turks in 1453.

Formerly a chief economist providing advice to institutional investors, Nathan Lewis now runs a private investing partnership in New York state. Published in the Financial Times, Asian Wall Street Journal, Huffington Post, Daily Yomiuri, The Daily Reckoning, Pravda, Forbes magazine, and by Dow Jones Newswires, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money (John Wiley & Sons, 2007), as well as the essays and thoughts at New World Economics.

See the full archive of Nathan Lewis articles.

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