Not-So-Great Moments in Inflation History - The American Spectator | USA News and Politics
Not-So-Great Moments in Inflation History
by and and

Prices can rise for any number of reasons. Non-monetary events like supply-chain disruptions, or a spike in demand for a hot product or service — or a government regulation that creates scarcity — can all push up prices. The “good” news (if you can call it that) is that the reasons for such price hikes are generally fairly obvious. You’ll see media reports, for example, about labor or trucker shortages that may be driving the higher prices. These events tend to be temporary. Sooner or later, those supply chain disruptions will come to an end. Even government constraints that may be pushing up prices — for instance, like rent controls — can be lifted. When the laws are repealed, the shortages will disappear. Prices eventually come down.

However, monetary inflation, real inflation — the kind that devastates economies and societies — is something different: a corruption of prices resulting from the debasement of currency by governments.

The Second-Oldest Profession

Currency debasement has been called the world’s second-oldest profession because it has been around since the invention of money. The very first coins, minted in Lydia (Turkey) in the seventh century B.C., did not contain the gold and silver indicated by their face value.

In ancient times, governments (and also counterfeiters) debased their coins by melting them down and reissuing them with cheaper metal mixed with a lower percentage of gold or silver. This newly created “wealth” might have been worth less than the old currency. But it could fund debt-strapped governments — and the excesses of rulers — at least at first.

Nero “Fiddles” with Rome’s Money

The Roman emperor Nero (37–68 A.D.) debased Roman coinage to pay for “riotous” extravagances that included decadent celebrations, lavish palaces, and gifts to friends. In the words of the historian Suetonius, “he made presents and wasted money without stint.” Nero debased the Roman denarius by adding copper to the silver coins. This relatively small reduction in value of about 10 percent was just the beginning.

By 260 A.D., Rome’s increasingly corrupt governments were debasing the coinage to pay their bills. Eventually, the coins contained only 4 percent silver. Then, to keep the game going still further, they minted coins with higher and higher denominations. Naturally, prices rose. According to one account, by the middle of the fourth century, the price of wheat was two million times higher than it had been in the mid-second century. The Roman economy collapsed into hyperinflation.

Soldiers eventually refused to take any more junk coins and only accepted commodities in payment. In the outer reaches of the Roman Empire, the use of money was entirely abandoned. People returned to barter. They also lost the habit of writing. Thus began the Dark Ages.

China Inflates “The Bark of Trees”

The Chinese, meanwhile, were the first to demonstrate the potential of paper money, which was used briefly around the early ninth century. The first real paper currency, however, was developed 200 years later by Szechwan merchants. Predictably, China’s government soon took over money printing. In the ensuing hyperinflation, the government was overthrown by the nomadic tribes of Manchuria.

The Manchus were also fascinated by the idea of getting bits of paper to pass as money. Unfortunately, when it came to handling this new invention, they did little better than their predecessors. Hyperinflation was followed by the Manchurian government’s defeat by the nomadic tribes of Mongolia. After two more governments and two more rounds of hyperinflation, the Chinese finally grew disgusted with paper currencies. Around 1440, China returned to highly reliable copper and silver coinage for the next 500 years.

The explorer Marco Polo brought China’s knowledge of paper money home to Europe. His famed travelogue, The Travels of Marco Polo, included a chapter that described “How the Great Khan Causes the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over His Country.”

Marco Polo returned to Venice in 1295, but paper money was slow to catch on in Europe. Why debase “the bark of trees” when you can devalue real gold and silver coins?

Europe: Mercantilism and Inflationism

Europe’s mercantilist monarchs of the 16th century were hellbent inflationists who debased their coinages, lowering their values by reducing their silver content. Britain’s most infamous coin debaser was King Henry VIII, known for his serial marriages and divorces (including two beheadings). In 1542, he began what was known as the Great Debasement to finance wars with France and Scotland, and also to fund his lavish royal lifestyle. England’s once-reliable silver pennies were depleted of about two-thirds of their silver content, sending the price of wheat skyward. Citizens hoarded older coins with higher amounts of precious metal. Foreign vendors demanded payment in bullion, causing a gold shortage and damaging trade. Henry’s daughter and eventual successor, Queen Elizabeth I, ultimately turned things around with a new issue of high-quality English silver coinage, which remained unchanged for centuries.

Inflation Sinks the Spanish Empire

With its territories stretching from California to the Philippines, and its prolific mines in Mexico and Bolivia, Spain led the mercantilist quest for gold and silver in the 16th century. Spain’s “silver dollars” became the regular coinage of China, the Philippines, and the whole New World from Argentina to the American colonies. All the silver dollars in the world, however, were not enough for Spain’s revenue-hungry government. Spain started to debase its domestic coinage beginning in 1599, even as its silver dollars continued to be minted in Mexico City. Thus began a long, sad tale of economic decline. The government struggled to pay its bills by issuing masses of copper coins stamped in ever-higher denominations.

By the 1640s, Spain, which had once stood astride the world like a Colossus, could barely manage its domestic affairs. At one point, the royal family itself could not raise the funds to travel to its nearby summer residence; sometimes the royal house lacked even bread. The empire disintegrated under the pressure of foreign invasion, domestic secession, and independence movements. Eventually, France replaced Spain as the preeminent power in Europe.

“Après Moi, le Deluge” of French Hyperinflation

The famous quote has been attributed to King Louis XV. But it more aptly applies to his great-grandfather, the (misnamed) Sun King, Louis XIV. In the late 17th century, the French were on the brink of bankruptcy, thanks to his rampant devaluations and spending. Their eventual solution? Not just more inflation, but one of the most destructive inflationary schemes of all time. Its improbable author was John Law, a Scottish economist, adventurer, and convicted murderer, who had insinuated himself into the upper reaches of French society and later the French government. He persuaded the monarchy that the way to solvency was through exploiting the riches of the New World via the Mississippi Company. This government trading venture would be financed in a new way — through the printing of paper money. What could go wrong?

In a word, everything. The company’s exploration of what today is Louisiana turned up little more than swampland and mosquitos. When the venture failed to deliver, the “Mississippi Bubble” burst. Shares collapsed, as did the value of France’s currency. The catastrophic inflation that ensued forced Law to flee the country. The French stopped using paper money for generations afterwards, returning to using only silver.

 “Not Worth a Continental”

Britain’s American colonies were also paper-money abusers and notorious inflaters. In 1690, Massachusetts used paper money to pay soldiers to wage war on the French colony of Quebec. The money was supposedly redeemable later in silver coins. But Massachusetts kept putting off the redeemability date and printing more notes. This strategy was initially so successful that money printing became the rage in the colonies, creating so many monstrous inflations that Britain had to step in and prohibit paper currency.

Not surprisingly, after the American Revolution began in 1775, one of the first acts of the upstart colonists was to bring back paper money to pay soldiers. The first U.S. currency, the Continental dollar, was so over-printed that it became “confetti” and collapsed into hyperinflationary oblivion. For nearly two centuries afterward, “not worth a Continental” was a casual term for worthlessness. Paper money also returned with France’s Revolution in 1789. This, too, collapsed in a hyperinflation that led to the ruin of the First Republic. Napoleon Bonaparte stepped in to restore order. In 1800, a new franc was introduced, reliably linked to gold. It remained unchanged until 1914.

The silver lining to these painful debacles was that they led to the rise of Enlightenment thinkers like John Locke and Adam Smith, who awakened people to the folly of inflationism. The American colonists gave up their century-long experiments with government-issued, fiat paper currencies. Later, Alexander Hamilton, the first Treasury secretary of the new United States, embraced the principle of a sound and stable dollar.

The moral of these stories: money is like everything else in an economy. It loses value when there’s too much of it.

“Money Printing,” However, Does Not Automatically Mean Inflation

The value of a currency, like the value of everything else, is ultimately determined by the ratio between supply and demand. For that reason, the notion that “money printing” inevitably leads to inflation is actually not true. Currency loses value, and inflation ensues, when there is an oversupply of money. But oversupply is different from “large supply.”

The Case of the Swiss Franc

If a giant money supply was the cause of rising prices, you’d think Switzerland would be overwhelmed by hyperinflation. With a population of just less than nine million, that country has eight times more base money per capita than Canada, whose population is nearly four times the size at 38 million.

Instead, the Swiss franc has been one of the world’s most reliable currencies over the past hundred years, with less inflation than the U.S. dollar, British pound, euro, or the preceding German mark. (READ MORE: Inflation Is America’s Payment for the Fed’s Printing Addiction)

As a result of this track record, many people outside Switzerland are eager to hold assets denominated in Swiss francs. In other words, demand for the Swiss franc is high. To meet this expanding demand, and keep the currency from rising uncomfortably, the Swiss central bank has had to increase supply aggressively.

A Vibrant Economy, Booming Money Supply — and No Inflation

When there’s sufficient demand, the amount of money in an economy can grow substantially. Between 1775 and 1900, the base money supply of the United States increased by an estimated 163 times. But the dollar’s value (versus gold) was nearly unchanged. That’s right: a 163 times increase in the quantity of money produced no change in the dollar’s value.

How was this possible? The answer, once again, is demand. During the 1800s, America experienced exponential growth. Its booming economy had a voracious appetite for money. The nation’s first Treasury secretary, Alexander Hamilton, had extinguished the wartime hyperinflation that threatened the young nation by establishing a financial system based on stable money; a U.S. dollar pegged to a fixed value of gold. This had turned the once struggling republic into a magnet for investment capital. By the end of the 19th century, the U.S. had become the leading industrial power in the world.

This essay is adapted from Inflation: What It Is, Why It’s Bad, and How to Fix It, out this week from Encounter Books.

Steve Forbes is chairman and editor-in-chief of Forbes Media, the foremost name in business information. A widely respected economic prognosticator and regular broadcast commentator, he hosts the acclaimed webcast “What’s Ahead.” He is author and co-author of several books, including Money, the bestselling How Capitalism Will Save Us, and Flat Tax Revolution. He helped create the award-winning documentary In Money We Trust? In 1996 and 2000, he campaigned vigorously for the Republican nomination for the presidency. 

Nathan Lewis is among the world’s leading authorities on monetary policy and economic history. He is the author of The Magic Formula: The Timeless Secret to Economic Health and Prosperity; Gold: The Once and Future Money; Gold: The Monetary Polaris; and Gold: The Final Standard. A Discovery Institute Fellow, his writing has appeared in Forbes, the Financial Times, and elsewhere. He publishes the Polaris Letter, a monthly investment newsletter available at  

Elizabeth Ames is a noted commentator and author. She has collaborated with Steve Forbes on several books, including Money. Her articles have appeared in, the Daily Caller, The American Spectator, and other outlets. She is co-producer and writer of the award-winning, public television documentary In Money We Trust?, which has aired nationwide and can be viewed at

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