To answer the question, let’s start with this basic fact: the federal government benefits from inflation. In 2022, the government “made” at least $2,000,000,000,000 (that’s $2 trillion!) from inflation.[1]
That $2 trillion had to come from somewhere, because “printing” money creates no value.
As Warren Buffet says about the poker game, if you don’t know who the patsy is, it’s you.
That $2 trillion came from all of us who produce or own assets.
Politicians won’t admit this, but the government benefits hugely from inflation. That fact is not unique to our government now. Governments across the world and across history have deliberately inflated the money supply to accomplish their goals. We’ll start our quick review of historical inflation by going all the way back to the Roman empire.
Today’s post will examine how the Emperor Diocletian pursued deliberate inflation to accomplish his goals.
Broadly speaking, governments have 3 ways to raise revenue: 1) taxation, 2) borrowing, 3) and printing money (inflation). And when governments spend large amounts of money, they need to raise revenue.
So when Diocletian wanted to finance expensive wars, he decided to use a combination of taxation and inflation.
Inflation in the Roman Empire
When Diocletian became Emperor of the Roman Empire in 284 CE, he embarked on a spending spree that would put all the world’s drunken sailors to shame. He spent money on expanding the size of the army. He spent money expanding the bureaucracy. He spent money building buildings. He spent money building a capitol. All that spending had to be financed somehow.
So he enacted three highly destructive policies: crushingly-high taxation, intentional debasement of the currency, and eventually price controls.
When Diocletian found that tax revenues were not sufficient, he augmented his coffers by debasing the silver denarius (the standard Roman coin). In those pre-paper money days, workers would gather in silver coins (from taxes and other sources). For example, they might take 1000 coins, melt them all, add some copper (much less valuable than silver), and remint 1100 coins. This process of adding a base metal to a precious metal was the original form of currency debasement.
Diocletian increased the money supply increased so much that prices rose out of control. During Diocletian’s rule and prior to his price controls, the price of wheat, for example, was 35 times higher than it had been the previous century, according to historian Richard Duncan-Jones.
Instead of fixing the problem by stopping increases in the money supply, Diocletian decided to shoot the messenger. He believed he could stop prices from rising by legally fixing prices. He resorted to price-fixing because he didn’t want prices to keep rising, but he was unwilling to stop creating new money.
He issued the famous Edict of Diocletian, which imposed price controls on commodities, labor, transportation, and animals. The edict was enforced on pain of death.
But price controls don’t work. They never have, and never will.[2] By holding prices below the market-clearing price (the price at which demand equals supply), price controls increase demand because consumers perceive that they can pay less than the market-clearing price for products. And by holding prices below the market-clearing price, price controls reduce supply because sellers can’t earn the market-clearing price in revenue. This mismatch between supply and demand inevitably creates shortages.
In Rome, the market price of commodities such as wheat was increasing because the money supply was increasing, and price controls merely incentivized sellers to sell on the black market (where they could charge market prices, prices that reflected the true cost of producing commodities) or flee Rome to escape Diocletian’s oversight. Shops closed. Supply fell. Goods disappeared. The price controls had the exact opposite effect of those hoped for by Diocletian.
Yet Diocletian doubled down on state control. To prevent peasants from fleeing their land and seeking refuge elsewhere, Diocletian issued a law tying all citizens to their land. In other words, it became illegal to leave. Farmers became bound to land as serfs.
So not only did reckless government spending create sustained inflation, it directly caused serfdom – an institution akin to slavery that wasn’t abolished in the west until the mid-19th century.
We’re uniquely qualified to offer you insight on inflation. Roger D. Silk holds a Ph.D. in applied economics from Stanford, and is the author of the recently published book explaining inflation: Politicians Spend, We Pay, available here.
[1] Here’s how we calculate that number. The government owed an average of about $30 trillion (!) in 2022. Inflation favors the debtor because the debtor gets to repay borrowed money using inflation-depreciated dollars. The value of dollar was depreciated by 6.5% CPI inflation during 2022. So the real, inflation-adjusted value of the government’s $30 trillion debt decreased by 6.5% of $30 trillion, or about $2 trillion.
[2] See, for example, Forty Centuries of Price Controls by Robert Schuettinger, published in 1979 by the Heritage Foundation.