Friday, May 10, 2013

Notes on Debasement

In Milton Friedman's Money Mischief, in a chapter titled "The Cause and Cure of Inflation" we read:

So long as money consisted of specie (whether gold, silver, copper, iron, or tin) inflation was produced either by new discoveries or technological innovations that reduced the cost of extraction or by debasement of the currency -- the substitution of "base" metals for "precious" metals.

As long as money "consisted of specie" there were only two ways to create inflation, Friedman says. And debasement was one of the ways to create inflation.

From Price Fixing in Ancient Rome ( Mises Daily: Thursday, June 18, 2009 by Robert L. Scheuttinger and Eamonn F. Butler):

In order to attempt to deal with their increasing economic problems, the emperors gradually began to devalue the currency. Nero (A.D. 54–68) began with small devaluations and matters became worse under Marcus Aurelius (A.D. 161–180) when the weights of coins were reduced. "These manipulations were the probable cause of a rise in prices," according to Levy.

And again:

It would seem clear that the major single cause of the inflation [from Nero to Diocletian] was the drastic increase in the money supply owing to the devaluation or debasement of the coinage.

As with Friedman, here also the manipulation of the metal in money is offered as the cause of inflation, not the result. It's probably both, as everything in the economy has two sides. But what I'm saying is that manipulation of the metal, debasement, is a response to changing conditions in the economy. Note the prefacing phrase in the first excerpt from Scheuttinger and Butler: "In order to attempt to deal with their increasing economic problems..."

The problem doesn't necessarily start with government debasing the currency. You have to look farther back, before the debasement, to find the source of the problem.

It's a cost problem.

// Update 28 May 2013: Here's another one from Milton Friedman:

Since time immemorial, sovereigns -- whether kings, emperors, or parliaments -- have been tempted to resort to increasing the quantity of money as a means of acquiring resources to wage wars, to construct monuments, or for other purposes. They have often succumbed to the temptation. Whenever they have, inflation has followed close behind.
(From Money Mischief, Chapter 8: The Cause and Cure of Inflation)

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