Whiskey Contributor

Gary Gibson, Introduction…

Inflation is a tax.

It’s just a very sneaky one. The fine folks over at Economic Collapse Blog explained it so well that we thought we’d share it with you…

“It is a continual tax on every single dollar that you own. As your money sits in the bank, it is constantly losing value. Over time, the effects of inflation can be absolutely devastating. For example, if you put 100 dollars in the bank in 1970, those same dollars today would only have about 17 percent of the purchasing power that they did back then. In essence, you were hit by an 83 percent “inflation tax” and all you did was leave your money in the bank. So who is responsible for this?

“Well, the Federal Reserve controls monetary policy in the United States, and the inflationary monetary policy that the Fed has gotten all of us accustomed to is taxing the living daylights out of us. This is madness, and it needs to stop.”

This is the point that the average Joe or Jane or combination thereof on the street seems to miss. People have just been conditioned to accept that prices “rise” over time.

They seem to be okay with that because they also think that their wages are rising at about the same rate as general prices.

What about their savings, however? Surely they understand that even if their income keeps up with inflation (it doesn’t…and over a couple of generations a little lag adds up to ever lower standards of living), aren’t they worried about how their savings are being eaten away by the inflation tax? Again, Economic Collapse Blog:

“Inflation is a tax that is very cruel to average American families. It destroys their wealth and it destroys the purchasing power of their paychecks.

“Unfortunately, this is always what happens when a society adopts fiat currency. Our dollars are just pieces of paper backed by absolutely nothing. When more pieces of paper are printed up, the value of the pieces of paper already in existence goes down.

“This is one of the reasons why so many people out there are talking about “real money” like gold and silver. Unlike fiat currency, precious metals tend to hold value over a very long period of time.

“For example, it will take you about three times as much U.S. currency to buy a gallon of gasoline in 2012 as it did back in 1990.

“But an ounce of silver will actually buy you more gasoline today than it did back then.

Back in 1990, an ounce of silver would buy you about 4 gallons of gasoline. Today it will buy you more than 8 gallons of gasoline.

“Talk about holding value.

“We see the same kind of thing happening with gold.

“When Barack Obama first took office, an ounce of gold was selling for about $850. Today an ounce of gold costs more than $1700 an ounce.

“It is not that gold is becoming so much more valuable. It is just that the U.S. dollar is losing value on a continual basis.

“So why don’t the U.S. government and the Federal Reserve quit flooding our economy with more paper money?

“That is a very good question.”

One way for us all to insure our purchasing power against the constant, sneaky tax (theft) of central bank inflation is store at least some of our savings as gold and silver.

Yet most people don’t do this despite history’s constant evidence that says they should. Rather most people look to other assets — real estate and stocks are especially popular — to gird against inflation. They’ll even lend money to the government that taxes them and inflates away their savings at a rate of interest that doesn’t counter the rate of loss due to new money creation!

They’ll even call gold and silver — the real money — “volatile” or “useless”.

You call this useless?

Silver: a horrible way to save?

We surmise that the average person is just too brainwashed and too ignorant of history to get it. They see silver and gold acting the way money ought…but they only hear the talking heads on the boob tube talking about the gold and silver crash of 1980.

They don’t look further back. They don’t see how gold and silver have held their purchasing power throughout American history and back through the centuries…

So in today’s feature article we offer a little help. Chris Horlacher shows us the history of another empire and silver, debasement and inflation. Read on below…

 

The Decline and Fall of the Roman Denarius

History repeats itself, so the scholars say. But according to Mark Twain it just rhymes. Literary quips and hair-splitting aside, I’ve found that one of the most valuable things anyone can do to advance their knowledge and understanding of the world is the study of history. Now I’m not talking about the kind of history you get in grade school and university, where all you’re told to do is rote-memorization of people, dates and events. To get any value whatsoever out of studying history, you have to be able to discern cause and effect. What causes civilizations to grow to greatness, and what causes them to collapse?

There are few collapsed civilizations that have been studied in quite the depth as the Roman Empire. Many theories have been offered, some with more merit than others. Ludwig von Mises argued that Rome was eroded from within and that economics played a huge part in it. This is too big of a story for me to cover in a single article, so I will focus on one of the most important aspects; the currency.

For hundreds of years, the Romans were on a bimetallic standard, not unlike the currency system of the early United States. There was a gold coin, the aureus, which was popularized by Julius Caesar. There was also a silver coin known as the denarius, which was what most Romans used in their day to day transactions. It was on a solid gold and silver standard that Rome ascended to the height of its development and power.

One of the greatest enemies of mankind is hubris, and the Roman Empire was certainly not immune to this. The phrase “bread and circuses” refers to the massive welfare spending that occurred in Rome during the height of its power. With the treasury filled with gold, spendthrift politicians quickly used the money to buy influence, votes and curry favour with neighbouring states.

“The budget should be balanced, the treasury should be refilled, public debt should be reduced, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.” — Cicero, 55 BC

When Julius Caesar first began minting large quantities of the aureus it was 8 grams of pure gold. By the second century it had declined to 6.5 grams and at the beginning of the fourth century it was replaced by the 4.5 gram solidus. The purity of the coin itself was never debased, but the ever decreasing weight was a sure sign that government spending had been outpacing revenues for centuries.

All of this however, pales in comparison with the devaluation of the denarius. The denarius was the backbone of the Roman economy. Citizens earning their income in gold were a rarity given that a day’s wage for an average labourer at the time is estimated at a single denarius. Thus it also became the target of severe abuse by the Roman authorities.

The denarius began as a 4.5 gram silver coin and had stayed that way for centuries under the Roman Republic. After Rome became an empire, things began to turn sour for the denarius and, by extension, the Roman economy. Base metals, such as copper were blended in with the silver and so even though the coin itself weighed the same, the amount of silver in it became less and less with each successive emperor. Throughout the first century the denarius contained over 90% silver but by the end of the second century the silver content had fallen to less than 70%. A century later there was less than 5% silver in the coin and by 350 AD it was all but worthless, having an exchange rate of 4,600,000 to a gold solidus (or nearly 9 million to the original aureus).

The economic chaos the hyperinflation of the denarius had on Roman society was very real. The population of Rome reached a peak of about 1 million inhabitants during the first century BC and maintained that level until nearly the end of the second century. At this point it began to slowly decline throughout the third century and precipitously throughout the fourth. By the fifth century, only about 50 thousand people remained.

Now compare the collapse in value of the denarius to some modern-day currencies and see if you notice any similarities:

Further reading in to the events that unfolded in Rome will reveal that as the denarius was debased, Rome became an economic basket case. Desperate times called for desperate legislation as the fabric of society was slowly torn apart by inflation. I urge my fellow readers to gain a firm grasp of these events because they will be instructive as to what we can expect for the future. The destruction of the Denarius is only one example of currency debasement, of which there are hundreds. Romans that held on to their gold coins fared well in the hyperinflation and if history is any guide, they will serve us well in the coming years.

Regards,

Chris Horlacher

The Dollar Vigilante


Chris Horlacher, CA is the Founder and Managing Director of Maple Leaf Metals Exchange Inc. He possesses a Chartered Accountant designation and is a former Senior Auditor for Deloitte & Touche LLP where he provided audit and assurance services to Fortune 500 companies, as well as independent businesses. He left Deloitte to aid Euro Pacific Canada Inc., an IIROC dealer-member, during its formative period by serving as Chief Financial Officer before founding Maple Leaf Metals Exchange Inc. Chris is also a correspondent for The Dollar Vigilante.

Whiskey Contributor

Whiskey & Gunpowder occasionally features commentary from financial analysts, experts, gold bugs and an array of contributors from various fields and occupations. Their diverse insights and contrarians investing ideas are hand selected by your Whiskey & Gunpowder editors.

  • Schoma

    Completely off-topic, but ha! the AU$1 note went out of circulation even before I was born. Completely reinforces the point on inflation, I guess.

  • Desertrat

    I got into the world of coin collecting and bullion trading some forty-five years ago. You learn a good bit of monetary history, therein. It has been emotionally satisfying as well as remunerative. Watching the events in today’s world brings as much amusement as profit–albeit with dismay at how little our Glorious Leaders have learned from history.

  • Peter S.

    A good picture of the falling silver content of a denarius – some more data on the topic can be found here: http://wiki.mises.org/wiki/Money_and_banking_in_Ancient_Rome

  • Dean

    When people like yourself make this argument ( which is absolutely convincing if one looks at just one currency alone ) there is never discussion of the one currency relative to all others., Why is that? And why do most societies have more now when your argument would seem to make the case for there being less? And why is there never talk of simply deflating the price level to reach that same value that the US$ once had? Why does no one ever advocate that?

    You discussion is impeccable in its box.

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