They say that men can’t stop thinking about the fall of the Roman Empire.
In my case, that’s not far from the truth, but not because I crave the power of an Emperor or dream of being a gladiator.
It’s because the fall of the Roman empire is linked with the degradation of its money. And I do care about money.
The most important gold coin of Ancient Rome was the aureus, (originally worth around 25 silver coins). Initially, it contained eight grams of pure gold. And then the ‘coin clipping’ started.
Nero (ruling AD 54-68) reduced the gold weight to 7.3g, essentially spreading the money supply and devaluing the coin. By 210 the gold content had fallen to 6.3g.
But it wasn’t just the gold coins that were altered. In order to pay the growing number of soldiers and administrators more coins were needed. Between 241 and 274, the silver coin (denarius) dropped from 48% to 5% purity.
“To be ignorant of what occurred before you were born is to remain forever a child.”
Cicero, c.50 BC
In 337, Constantine replaced the aureus with the solidus - a smaller coin with 4.5 grams of 24-karat gold. Initially, one solidus was worth 275,000 denarii, but by 356, one solidus was worth 4,600,000 denarii. That is some serious inflation.
So what?
Money changes.
Money issuers inflate the supply and the number of coins we need to buy a loaf of bread rises.
Well, despite the declining quality of the metal content of their denarius, the government refused to accept anything other than pure gold and silver in payment of taxes. Take in the sound money, and distribute the bad.
Precious metals as coins failed because a reliable supply could not be sourced. The Roman Empire expanded much faster than the possible extraction could keep up with. The only way to balance the books was to conquer new lands and expand the tax base. Does that remind you of anything? Fiat economies nowadays bank on population growth to borrow against future tax revenue.
By 476, the Roman Empire couldn’t even pay enough soldiers to
protect its capital. Rome fell, and the rest is history…
Bad money brought down the most powerful empire in the world.
Monetary Failures: Learning from past mistakes
Paper money was first issued by the emperor Xianzong in the ninth century in China due to a shortage of copper. This was only temporary, and the first permanent paper money was issued by the Jin dynasty in the twelfth century.
It was much easier to transport promissory notes compared to heavy metal, and European countries also started using paper banknotes issued by banks and private institutions instead of metal coins. These notes could be exchanged for their face value in metal coins anytime.
Sounds great. So why don’t we still use this system and pay for everything in cash?
Two reasons: globalization and the increased desire for state record-keeping.
Try to send large amounts of cash across borders. Not easy, is it? Plus, the world has 180 currencies to transfer between and navigate. Paper simply doesn’t fit the need for immediate global settlement.
And with a more mobile population earning money selling services, it’s harder for governments to track and demand tax revenue. Cash is quickly being ushered out, especially in my country, India. Digital payments can be tracked, logged, and taxed.
Paper money is expensive to produce, especially in countries with a high inflation rate. For example, if Venezuelans want to pay in cash for their shopping, they might need to bring a suitcase, not a wallet.
So what’s wrong with electronic money? Our current preferred method of settlement?
It’s fast, trackable, transportable, and works across borders.
The two main issues, as I see it, are the lack of equal access, and third-party control.
According to the World Bank, over 1 billion adults in the world do not have a bank account.
Read that again. One billion!
The notion that we all have access to mobile payments, fintech systems, internet banking, and digital financial products is flat-out wrong. By operating in a system of unequal access, we widen wealth gaps and inequality. Many people simply cannot afford the devices and data required to operate in the sphere of digital payments, or the platforms are only open to countries in the global north.
What good is it being a digital entrepreneur if you can’t accept payments via PayPal or Stripe? Citizens of war-torn countries or corrupt regimes end up at the mercy of their government’s decision on how to control payments.
The other danger of relying on electronic payments? The middlemen.
As third-party payment facilitators, banks have become the arbiters of who and how we pay. Fraud protection is a huge issue for neobanks like Revolut, who fail to protect some customers while being over-zealous in blocking payments from others.
Why money fails?
Gold: challenging to verify, store, divide, and transport.
Coins: degradation and coin clipping leads to inflation. Heavy to transport.
Paper: cannot be used globally and does not log payments.
Electronic money: not equal-access. Risk of third-party failures or interventions.
(This will be covered in Part 2 along with the fiat monetary system).
How can new money succeed?
New money must improve on the old iterations. It must be scarce, easily divisible, secure, open access, transportable, and decentralized.
Bitcoin fulfills all these properties, but that doesn’t mean it will become the money of choice overnight. Systems take time to change and often co-exist for some time.
After all, the Roman Empire didn’t fall in a day.
It took over 400 years.
Additional sources:
The rise and fall of sound money
The Global Findex Database 2021
If you’d like to learn more about bitcoin, ‘the Internet of money’, I recommend these excellent explainer videos from Andreas Antonopoulos.
Thanks for reading. I’ll be back with another article next month.
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