Hyperinflation and trust in Ancient Rome

Since it hit 1,000,000% in 2018, Venezuelan hyperinflation has actually been not only continuing but accelerating. Recently, Venezuela’s annual inflation hit 10 million percent, as predicted by the IMF; the inflation jumped so quickly that the Venezuelan government actually struggled to print its constantly-inflated money fast enough. This may seem unbelievable, but peak rates of monthly inflation were actually higher than this in Zimbabwe (80 billion percent/month) in 2008, Yugoslavia (313 million percent/month) in 1994, and in Hungary, where inflation reached an astonishing 41.9 quadrillion percent per month in 1946.

The continued struggles to reverse hyperinflation in Venezuela are following a trend that has been played out dozens of times, mostly in the 20th century, including trying to “reset” the currency with fewer zeroes, return to barter, and turning to other countries’ currencies for transactions and storing value. Hyperinflation’s consistent characteristics, including its roots in discretionary/fiat money, large fiscal deficits, and imminent solvency crises are outlined in an excellent in-depth book covering 30 episodes of hyperinflation by Peter Bernholz. I recommend the book (and the Wikipedia page on hyperinflations) to anyone interested in this recurrent phenomenon.

However, I want to focus on one particular inflationary episode that I think receives too little attention as a case study in how value can be robbed from a currency: the 3rd Century AD Roman debasement and inflation. This involved an iterative experiment by Roman emperors in reducing the valuable metal content in their coins, largely driven by the financial needs of the army and countless usurpers, and has some very interesting lessons for leaders facing uncontrollable inflation.

The Ancient Roman Currency

The Romans encountered a system with many currencies, largely based on Greek precedents in weights and measures, and iteratively increased imperial power over hundreds of years by taking over municipal mints and having them create the gold (aureus) and silver (denarius) coins of the emperor (copper/bronze coins were also circulated but had negligible value and less centralization of minting). Minting was intimately related to army leadership, as mints tended to follow armies to the front and the major method of distributing new currency was through payment of the Roman army. Under Nero, the aureus was 99% gold and the denarius was 97% silver, matching the low debasement of eastern/Greek currencies and holding a commodity value roughly commensurate with its value as a currency.

The Crisis of the Third Century

However, a major plague in 160 AD followed by auctions of the imperial seat, major military setbacks, usurpations, loss of gold from mines in Dacia and silver from conquest, and high bread-dole costs drove emperors from 160-274 AD to iterative debase their coinage (by reducing the size and purity of gold coins and by reducing the silver content of coins from 97% to <2%). A major bullion shortage (of both gold and silver) and the demands of the army and imperial maintenance created a situation where a major government with fiscal deficits, huge costs of appeasing the army and urban populace, and diminishing faith in leaders’ abilities drove the governing body to vastly increase the monetary volume. This not only reflects Bernholz’ theories of the causes of hyperinflations but also parallels the high deficits and diminishing public credit of the Maduro regime.

Inflation and debasementFigure 1 for Fiat paper

Unlike modern economies, the Romans did not have paper money, and that meant that to “print” money they had to debase their coins. The question of whether the emperor or his subjects understood the way that coins represented value went beyond the commodity value of the coins has been hotly debated in academic circles, and the debasement of the 3rd century may be the best “test” of whether they understood value as commodity-based or as a representation of social trust in the issuing body and other users of the currency.

Figure 2 for Fiat paper

Given that the silver content of coins decreased by over 95% (gold content decreased slower, at an exchange-adjusted rate shown in Figure 1) from 160-274 AD but inflation over this period was only slightly over 100% (see Figure 2, which shows the prices of wine, wheat, and donkeys in Roman Egypt over that period as attested by papyri). If inflation had followed the commodity value of the coins, it would have been roughly 2,000%, as the coins in 274 had 1/20th of the commodity value of coins in 160 AD. This is a major gap that can only be filled in by some other method of maintaining currency value, namely fiat.

Effectively, a gradual debasement was not followed by insipid ignorance of the reduced silver content (Gresham’s Law continued to influence hoards into the early 3rd Century), but the inflation of prices also did not match the change in commodity value, and in fact lagged behind it for over a century. This shows the influence of market forces (as monetary volume increased, so did prices), but soundly punctures the idea that coins at the time were simply a convenient way to store silver–the value of the coins was in the trust of the emperor and of the community recognition of value in imperial currency. Especially as non-imperial silver and gold currencies disappeared, the emperor no longer had to maintain an equivalence with eastern currencies, and despite enormous military and prestige-related setbacks (including an emperor being captured by the Persians and a single year in which 6 emperors were recognized, sometimes for less than a month), trade within the empire continued without major price shocks following any specific event. This shows that trust in the solvency and currency management by emperors, and trust in merchants and other members of the market to recognize coin values during exchanges, was maintained throughout the Crisis of the Third Century.

Imperial communication through coinage

This idea that fiat and social trust maintained higher-than-commodity-values of coins is bolstered by the fact that coins were a major method of communicating imperial will, trust, and power to subjects. Even as Roman coins began to be rejected in trade with outsiders, legal records from Egypt show that the official values of coins was accepted within the army and bureaucracy (including a 1:25 ratio of aureus-to-denarius value) so long as they depicted an emperor who was not considered a usurper. Amazingly, even after two major portions of the empire split off–the Gallic Empire and the Palmyrene Empire–continued to represent their affiliation with the Roman emperor, including leaders minting coins with their face on one side and the Roman emperor (their foe but the trusted face behind Roman currency) on the other and imitating the symbols and imperial language of Roman coins, through their coins. Despite this, and despite the fact that the Roman coins were more debased (lower commodity value) compared to Gallic ones, the Roman coins tended to be accepted in Gaul but the reverse was not always true.

Interestingly, the aureus, which was used primarily by upper social strata and to pay soldiers, saw far less debasement than the more “common” silver coins (which were so heavily debased that the denarius was replaced with the antoninianus, a coin with barely more silver but that was supposed to be twice as valuable, to maintain the nominal 1:25 gold-to-silver rate). This may show that the army and upper social strata were either suspicious enough of emperors or powerful enough to appease with more “commodity backing.” This differential bimetallist debasing is possibly a singular event in history in the magnitude of difference in nominal vs. commodity value between two interchangeable coins, and it may show that trust in imperial fiat was incomplete and may even have been different across social hierarchies.

Collapse following Reform

In 274 AD, after reconquering both the Gallic and Palmyrene Empire, with an excellent reputation across the empire and in the fourth year of his reign (which was long by 3rd Century standards), the emperor Aurelian recognized that the debasement of his currency was against imperial interests. He decided to double the amount of silver in a new coin to replace the antoninianus, and bumped up the gold content of the aureus. Also, because of the demands of ever-larger bread doles to the urban poor and alongside this reform, Aurelian took far more taxes in kind and far fewer in money. Given that this represented an imperial reform to increase the value of the currency (at least concerning its silver/gold content), shouldn’t it logically lead to a deflation or at least cease the measured inflation over the previous century?

In fact, the opposite occurred. It appears that between 274 AD and 275 AD, under a stable emperor who had brought unity and peace and who had restored some commodity value to the imperial coinage, with a collapse in purchasing power of the currency of over 90% (equivalent to 1,000% inflation) in several months. After a century in which inflation was roughly 3% per year despite debasement (a rate that was unprecedentedly high at the time), the currency simply collapsed in value. How could a currency reform that restricted the monetary volume have such a paradoxical reaction?

Explanation: Social trust and feedback loops

In a paper I published earlier this summer, I argue that this paradoxical collapse is because Aurelian’s reform was a blaring signal from the emperor that he did not trust the fiat value of his own currency. Though he was promising to increase the commodity value of coins, he was also implicitly stating (and explicitly stating by not accepting taxes in coin) that the fiat value that had been maintained throughout the 3rd Century by his predecessors would not be recognized going forward by the imperial bureaucracy in its transactions, thus signalling that for all army payment and other transactions, the social trust in the emperor and in other market members that had undergirded the value of money would now be ignored by the issuing body itself. Once the issuer (and a major market actor) abandoned fiat currency and stated that newly minted coins would have better commodity value than previous coins, the market–rationally–answered by moving quickly toward commodity value of the coins and abandoned the idea of fiat.

Furthermore, not only were taxes taken in kind rather than coin, but there was widespread return to barter as those transacting tried to avoid holding coins as a store of value. This pushed up the velocity of money (as people abandoned it as a store of value and paid higher and higher amounts for commodities to get rid of their currency). The demonetization/return to barter reduced the market size that was transacted in currency, meaning that there were even more coins (mostly aureliani, the new coin, and antoniniani) chasing fewer goods. The high velocity of money, under Quantity Theory of Money, would also contribute to inflation, and the unholy feedback loop of decreasing value causing distrust, which caused demonetization and higher velocity, which led to decreasing value and more distrust in coins as stores of value kept this cycle going until all fiat value was driven out of Roman coinage.


This was followed by Aurelian’s assassination, and there were several monetary collapses from 275 AD forward as successive emperors attempted to recreate the debased/fiat system of their predecessors without success. This continued through the reign of Diocletian, whose major reforms got rid of the previous coinage and included the famous (and famously failed) Edict on Maximum Prices. Inflation continued to be a problem through 312 AD, when Constantine re-instituted commodity-based currencies, largely by seizing the assets of rich competitors and liquidating them to fund his army and public donations. The impact of that sort of private seizure is a topic for another time, but the major lesson of the aftermath is that fiat, once abandoned, is difficult to restore because the very trust on which it was based has been undermined. While later 4th Century emperors managed to again debase without major inflationary consequences, and Byzantine emperors did the same to some extent, the Roman currency was never again divorced from its commodity value and fiat currency would have to wait centuries before the next major experiment.

Lessons for Today?

While this all makes for interesting history, is it relevant to today’s monetary systems? The sophistication of modern markets and communication render some of the signalling discussed above rather archaic and quaint, but the core principles stand:

  1. Fiat currencies are based on social trust in other market actors, but also on the solvency and rule-based systems of the issuing body.
  2. Expansions in monetary volume can lead to inflation, but slow transitions away from commodity value are possible even for a distressed government.
  3. Undermining a currency can have different impacts across social strata and certainly across national borders.
  4. Central abandonment of past promises by an issuer can cause inflationary collapse of their currency through demonetization, increased velocity, and distrust, regardless of intention.
  5. Once rapid inflation begins, it has feedback loops that increase inflation that are hard to stop.

The situation in Venezuela continues to give more lessons to issuing bodies about how to manage hyperinflations, but the major lesson is that those sorts of cycles should be avoided at all costs because of the difficulty in reversing them. Modern governments and independent currency issuers (cryptocurrencies, stablecoins, etc.) should take lessons from the early stages of previous currency trends toward trust and recognition of value, and then how these can be destroyed in a single action against the promised and perceived value of a currency.

A Small Reason Why I Don’t Want Big Government

Santa Cruz, California is really Silicon Valley Beach. It’s the closest; the next one is quite far. That’s in addition to drawing visitors from deep into the Central Valley of California, and a surprising number of European visitors.

One attractive beach close to its municipal wharf has only two (2) toilets. On Labor Day weekend Sunday, one of the two toilets was out of order. I estimate there were between 500 and a thousand people on that particular beach.

The day before, Labor Day weekend Saturday, the same toilet was already out of order. It was still out of order on Monday, Labor Day itself.

It was only a few months ago that the City of Santa Cruz joined a class action suit by a number of government entities against major oil companies for causing climate change. The first judge to look at the suit send the plaintiffs packing, of course.

So, this city of 60,000 wants to stop global warming but it does not have the ability to place two working toilets at the disposal of hundred of visitors who leave thousands of dollars in its coffers. The city cannot afford to hire a competent plumber on an emergency basis to fix the problem immediately. It does not have the timeX2 that would be required. Make it timeX3 on the outside. The total would come to $500 tops. Make it $1,000. It does not change anything.

The same happened last year or the year before. Surprise!

This is pathetic. We are governed by morons. Their gross incompetence is not natural, I am guessing. It’s learned stupidity. Our fault. We vote them in – with big help from UC Santa Cruz undergraduates who don’t care one way or the other, just want to feel good by electing “progressives.”

No one told our City Manager that Labor Day weekend, and its crowds, were coming. How was he supposed to know?


  1. Criticizing libertarianism (meh; racism is a much bigger problem) Arnold Kling, askblog
  2. The Black Boys’ rebellion Michael Taube, Claremont Review of Books
  3. Rudyard Kipling’s American years John Butler, Asian Review of Books
  4. The strangling of European democracy Daniel Ben-Ami, spiked


  1. Trump’s “Salute to America” is a salute to government employees Ryan McMaken, Power & Market
  2. Oligarchs and oligarchs Branko Milanovic, globalinequality
  3. The deleted clause of the Declaration of Independence Kevin Kallmes, NOL
  4. Class and optimism Chris Dillow, Stumbling & Mumbling


  1. Working in President Trump’s Council of Economic Advisers Casey Mulligan, Supply and Demand (in that order)
  2. How not to use percentages in a news story Joakim Book, Power & Market
  3. Climate change denialism Jacques Delacroix, Liberty Unbound
  4. The Mahabharata in South Asia, Europe, and East Asia Michael Kinadeter, JHIBlog

Institutions, Machines, and Complex Orders (Part 3): Evolutionary drift

The affirmation that one should not judge the historical past with current values ​​forms a topic as widespread as the disobedience to it. However, a conscious exercise of the evaluative critique of the past allows us to identify continuities and disruptions in institutional patterns, i.e., in systems of incentives that are considered legitimate, whether by virtue of a question of social utility or principles.

Caste systems are obvious examples in which a differentiated attribution of rights, that is to say the legal protection of the interests of individuals assigned to a certain ethnic group, was interpreted as legitimate because it was a matter of principle.

While a caste is defined by an ethnic component, or at least with respect to its physiognomic marker, in the status system the ethnic differences lose preponderance, to transfer it to the different private orders or privileges that determine a function within the society. In both cases, both in the system of castes and status, it should be noted that they not only define privileges for its members but mainly establish obligations: war, worship or field work, for example. While the cult is reserved for a certain caste, in the status societies the cult is an institutionalized function, an order, whose members fulfilled certain procedures of admission and permanence.

In any case, beyond the similarities and differences in the systems of castes and status, what matters in this case is to emphasize that such attributions of rights and obligations, that is, of legal protection of interests, collective or particular, do not respond to a question of social utility but of principles. In the first place, because in such societies the power is fragmented and therefore there is no central power that can perform a critical judgment on the social utility of a given system of incentives; at the most, if there is a king, he assumes a role of primus inter pares, an arbitrator between castes or statuses or protector of order.

The emergence of central governments demanded the emergence of stable bureaucracies supported by a tax system to be systematized in a public accounting, that is, a calculation of utility. On the other hand, the incorporation of abstract procedures from private law to the administration of the government, displacing the systems of sages, mandarins, humanists, etc., allowed a better centralization and control and rational administrative decisions. However, what is important to note here is that such institutional innovations did not necessarily depend on a disruptive change, such as a revolution, but that many cases occurred through an evolutionary process, in which more efficient institutions displaced obsolete ones.

The emergence of central governments replaced fragmented political and social systems, because centralization allows a calculation of utility in decision making, which yields better results -not always but most of the time- than a decision system based mainly on honour. Most of the time but not always, since there is the possibility that, in a situation of extreme complexity, the calculation of utility has a wide margin of error and, in contrast, in such situations, a pattern of decisions based on emotions, traditions, or moral principles work as a kind of heuristic better adapted to the circumstances. After all, for the calculation of utility to be viable, it must have tools such as an accounting system, a literate bureaucracy, an abstract procedural system, among others. If you do not have such means, hardly a decision based on utilitarian issues is far from whimsical and arbitrary. Faced with such cases, traditional structures could be more efficient.

Another issue to consider is not to be confused between the rationalization of political power in a central administration – public budgets and control of their execution, a neutral and efficient tax system, administrative decisions of a particular nature adopted according to abstract and general procedures – with the rationalization of each subsystem of society and even of the individual in particular.

It is true that, as indicated by Max Weber, the bureaucratization of political power leads to the gradual bureaucratization of the rest of society: the generalization of the same accounting system for all companies, in order to verify compliance with tax obligations, the public instruction of the whole population, to name a few examples. These processes of rationalization are extremely beneficial and generate a jump in productivity. This is what William Easterly, in his work The Quest for Economic Growth, highlights as a phenomenon in which knowledge leaks and spreads throughout society. In this way the relations of complementarity generated by the knowledge shared with the rest of the individuals that make up a given community are much more important than the substitution effect could give an advantage to a single possessor of such knowledge. For example, having knowledge of accounting represents an advantage over the competition, but that all companies are organized according to reasonable and homogeneous accounting principles allows a jump in productivity throughout the system that yields even greater individual profits. Likewise, not only the leaking of knowledge is beneficial for all members of society, but reached a point is inevitable.

However, this does not mean that a rationalization of the society as a whole and of the individuals that compose it is necessarily possible or desirable; much less that such process is directed from a central political power. A process of compulsive and totalizing rationalization is not always modernizing. Both in biological and cultural terms, the evolution occurs in the margins, it is the mutations of small isolated populations that allow them to adapt to changes in the environment.

Moreover, the totalizing political systems, which not only seek to define from a central power each one of the functions of the social subsystems in function of a supposed calculation of utility, also seek to build a notion of “citizenship” that stifles the sphere of autonomy that defines each individual with civic obligations. Such conceptions are the first to see the processes of innovation and creative destruction and any individual initiative as dangerous. Thus, by cutting off all possible adaptation to changes in circumstances, by mutilating all possible discoveries, it is not uncommon for such political systems to experience stagnation and be displaced by other systems more open to innovation – or at least be invaded by results of said competition, discovery and innovation processes.

[Editor’s note: Here is Part 2; Here is the full essay.]

Back in Brazil: bureaucracy

After two years away, I’m trying to put my life back on tracks in Brazil, and one of the main obstacles for doing so is the country’s crazy bureaucracy. Maybe this will come as no surprise for many, but Brazil is known for its big fat bureaucratic system, and basically, any rational analyst I’ve ever heard or read believes that this is one of the main obstacles for the country’s economic growth.

One of the problems I’m facing is getting the money from my FGTS. FGTS stands for “Fundo de Garantia do Tempo de Serviço”, a compulsory savings account that all Brazilian workers are forced to have. The moment you get a job, your employer is responsible for putting a percentage of your salary in the account. In case you are fired (or retire, or get cancer – seriously), you can get the money.

FGTS was created in 1966, at the beginning of the military regime that lasted from 1964 to 1985. Funny enough, people on the left, who demonize the Military governments, are today the main defensors of FGTS. Reality is, as you can probably tell, that this does little to help workers. FGTS has a very low interest rate, lower than the country’s inflation. That means that you actually lose money with it. Any other private investement would be better. Besides, it is clear that its reason to be is not to help workers. FGTS was created because bureaucrats realized that Brazilians had no culture of savings, therefore the government had to create one in order to have some money reserve to use. And using it government did. FGTS accounts have frequently been used by the government to try to boom the economy Keynesian style. Trying to get your FGTS money is crazily hard. Bureaucracy turns into a maze and can win you by fatigue. Perhaps I should just leave my money with the government.

The Bolsonaro government is trying to modernize the economy, and part of the process might involve putting an end to FGTS and other peculiarities created by Brazilian bureaucrats in the past. The left, however, complains that workers are losing rights. I can tell by personal experience that I would be losing my right to have a very poor savings account that I didn’t choose and that I have a very hard time to get access to. But try to explain this to millions of workers that are still hostages for labor unions and left-wing political parties.