Thursday, February 15, 2024

When Was History's First Monetary Inflation?

Click here to read the original Cautious Optimism Facebook post with comments

4 MIN READ - As inflation tries but fails to fade away from news headlines, the Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff discusses its ancient beginnings.

Despot: Dionysius I of Syracuse

Last year the Economics Correspondent posted entries on two important inflations from the past: debasement of the Roman empire’s silver denarius coin (100-268 AD) and the overissuance of unbacked paper money by the Chinese Song Dynasty (around 1100 AD).

But what’s the oldest known story of inflating a money supply and setting off rapid price increases?

Rome in 100 AD is pretty darn old, but could there actually be a government or sovereign who inflated even earlier? As it turns out the answer is yes, and by nearly five more centuries.

First lets trace the start of coinage itself. There is evidence of limited bronze “shells” being produced in China around 1100 BC although the shape was more like a seashell and quantities/circulation were limited.

Around that same century iron ingots and rods named “obols” appeared in the eastern Mediterranean region. They too did not establish a significant monetary economy and were also not shaped as coins.

The first precious metal coins appear to have been struck in 7th century BC Lydia—a kingdom in what is today central and western Turkey. Made from electrum, a naturally occurring alloy of gold and silver, the world’s first standardized precious metal coinage is officially dated beginning in the 600’s BC.

The concept of standardized precious metal coinage spread from there to surrounding areas, taking hold in Ionian Greece (predominantly using silver by then) around the early 6th century BC.

Since conducting commerce using a standard medium of exchange is far more efficient than time-consuming direct or indirect barter, it should come as no surprise that Greece developed into a major civilization shortly afterwards as its economy now enjoyed a significant one-up in that part of the world.

The old name “obol” was applied to the novel Greek coins, but the word “drachma," from "to grasp," quickly came to denote six obols and the name stuck for centuries until the Roman conquest. Incidentally the modern drachma was reintroduced in the 19th century and remained Greece’s official currency until its transition to the euro in 2001.


With the introduction of the ancient drachma we are now on the cusp of history’s first known inflation which took place on the island of Sicily in the city-state of Syracuse.

From 405 BC to 367 BC the frontier Greek province of Syracuse was ruled by a tyrant named Dionysius the Elder. As despot he waged multiple wars, capturing other cities in Sicily and southern Italy. He also conducted pillaging expeditions on the Ionian coastline, all througout living in regal splendor.

So much war and luxury was quite costly, and to pay for his spending addiction Dionysius resorted to a combined strategy of plunder and heavy taxation. Soon however, each incremental hike in duties became self-defeating due to capital flight and economic activity moving underground. Technically speaking Dionysius had stumbled across the Laffer Curve principle 2,300 years before Arthur Laffer was born. 

Thus Dionysius added another revenue source: borrowing. Issuing written promises to repay borrowed drachmae to creditors, he accumulated so much debt that he soon found securing the necessary funds to repay difficult. Wealthy nobles and the public at large, aware of Dionysius’ growing credit problems, refused to lend him more.

So as the strain of an imminent debt repayment neared he enacted a novel idea based on a principle which governments have borrowed (forgive the pun) ever since.

Dionysius announced a recoinage, ordering the citizens of Syracuse, under penalty of death, to surrender their silver drachmae in exchange for newly reminted coins. He then ordered his mint to restamp every one drachma coin with a new denomination of two drachmae and voila! his fiscal problems were solved. All at once Dionysius returned to the people the same number of drachmae he had originally taken, repaid all his debts, and retained a windfall for himself.

Of course inflation immediately took hold and prices doubled throughout the province, but in the 380’s BC virtually no one understood the connection between Dionysius’ recoinage and the mysterious appearance of sharply higher prices. When it came to the subject of inflation the citizens of Syracuse possessed the same level of sophistication as, say... Elizabeth Warren and Alexandria Ocasio-Cortez.

Later Dionysius’ son, named Dionysius the Younger, is believed to have poisoned his father and took full control of Syracuse in 367 BC. He too ruled as a despot but was far less competent than the Elder and was exiled after an invasion.

However, as economist Max Winkler penned in 1933, Dionysius the Elder holds the distinction of forever being world history’s “father of currency devaluation.”


Today, modern governments effectively use Dionysius’ ancient methods albeit with greater subtlety and stealth. 

Citizens are no longer forced to submit their wealth for reminting under penalty of death. Rather governments decree the only form of money they will accept for tax payment is the crummy version issued by their central banks, and failure to comply will result in a less despotic seizure of your funds and property, or a paid vacation in prison. 

In contractual disputes their courts also refuse to rule in favor of any party not paying in government money (i.e. legal tender laws), thus guaranteeing their weakening currency's ubiquitous circulation.

Modern governments don’t debase as rapidly as Dionysius’ doubling of the coin, well... except for Argentina, Venezuela, Sudan, Zimbabwe (still) and many other countries on countless occasions going back through the 20th century.

By contrast advanced economies with more enlightened governments debase more slowly, the United States for example having whittled the dollar down to a more generous 13 cents since 1971.

However the principle of currency devaluation as a means to ease debt burden remains fundamentally unchanged. Just as Dionysius could claim to have repaid his debts with the same number of drachmae that he had borrowed, so too the U.S Treasury technically repays the same number of dollars it borrows. What’s unspoken is that they repay with dollars that, by design, are worth half their value when borrowed twenty-five years prior—all thanks to the magic of debasement, courtesy of the Federal Reserve, or the ECB, or the Bank of England, etc…

Finally the operating costs of debasement are far lower today than in Dionysius’ time or even ancient Rome or medieval Europe. No longer do governments need to operate huge mints solely for the purpose of restamping coin denominations or draining their silver content. Instead modern central banks run by PhD and DEI technocrats simply employ a few computer keystrokes to inflate the money supply, usually upping it two to three percentage points faster than the growth rate of real goods and services.

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