I. Introduction

II. Historical examples

A. Rome

From about 190 AD to around 290 AD, the Roman Empire underwent what historians refer to as the “Crisis of the 3rd Century,” during which Rome had around 20-25 legitimate e
mperors at one time or another. Emperor Lucius Septimius Severus, who reigned during the beginning of this crisis, had some striking advice for his sons on how to handle the future of the empire during these times: “Live in harmony; enrich the troops; ignore everyone else.”

When Caracalla, one of Septimius’s sons, became emperor, he did exactly that (except for the “live in harmony” part, considering that he almost immediately murdered his brother.) He went about levying all kinds of new taxes in order to increase the size of the Roman military and State. For example, he raised the pay of soldiers by 50 percent, funded by a doubling of the inheritance tax paid by Roman citizens. When even this tax proved to be insufficient, Caracalla extended citizenship to nearly every member of the empire, simply to have a larger tax base.
However, high taxes proved to not be enough for Caracalla’s plans, and if he increased taxes any more he risked rebellion by his subjects and a possible collapse of trade. Thus, he resorted to a secretive and insidious method to generate more revenue for the government – he debased the currency.

The silver denarius introduced earlier by Emperor Augustus was about 95 percent silver. It had gradually fallen in value, and Caracalla brought it all the way down to only 50 percent silver. However, after Caracalla things got worse, as the job of managing a worldwide empire became more and more expensive. To help fund this, emperors continued to debase the currency, and by 268 AD the denarius was only 0.5 percent silver.

The result, especially from an Austrian view of economics, was predictable. Prices throughout the empire rose by up to 1,000 percent. The “barbarians” hired by the emperor as mercenaries would not even accept Roman coinage as payment, and insisted on being paid in gold. Such manipulations of Roman coinage continued through to the empire’s end, and directly contributed to its demise.

III. Inflation as a tax

The similarities between the ancient Roman and modern American governments should give us insight into why governments have central banks. At the end of the day currency debasement is simply another tax, albeit a tax which most people do not understand, and do not even know is being levied upon them. While the Roman empire debased the currency by simply lowering the percentage of gold or silver in the currency, the United States does so either by printing new money without any accompanying increase in production or by engaging in fractional reserve banking, via which banks lend out money which they do not have, being “insured” by the federal government.

Interestingly enough, the two governments seemed to use these practices for similar reasons. Caracalla needed to increase war spending, and thus debased the currency to do so. The United States has done exactly the same thing throughout its history and especially the last 100 years, and today is attempting to fund an empire which consists of soldiers in over 140 countries worldwide and dozens of nations which are essentially economic dependents.

Governments prefer this method of raising revenue to direct taxation. If the American tax collectors actually walked up to the average worker and said that they would be taking a huge portion of this worker’s wages and giving it to bankers on Wall Street, such a worker would be furious. However, government-controlled central banks do exactly this via economic stimulus packages which create new money and then give it to these banks, directly debasing the currency and thus lowering the worker’s real wages, which are the actual value of what he takes home rather than the numerical value of how many dollars and cents he has.

Considering the expenditures that have been taken on by the federal government, such a massively inflationary monetary policy is not surprising. It is such a policy which has caused a 96% drop in the value of the dollar since the founding of the Federal Reserve System in 1913.