Monetary Policy

Lessons from Ancient Rome about the perils of quantitative easing

Earlier this month inflation hit 3.2%, up from 2.1% in the 12 months to July. The jump is the largest since the current measurement series began in 2006. The Governor of the Bank of England, Andrew Bailey, has been eager to allay investor fears arguing the rise is only temporary, while dispelling concerns that rising prices are being fuelled by a combination of profligate Government spending facilitated by quantitative easing.

As a result of the pandemic, the Bank of England has created £450 billion out of thin air, which it has used to purchase Government bonds, providing the Government with more money to spend. The initial reasoning was sound: the Government needed additional funding to support the furlough scheme and to increase the money supply into the economy. With interest rates already at a historic low, quantitative easing offered another way to drive increased spending and investment in the economy.

QE is a neat trick in the short term, but it’s not without its side effects, chief among these is inflation. The more money that is ‘printed’ the worse the inflationary pressure becomes. The Bank of England shows little sign of reigning in its printing. A report from the House of Lords’ Economics Committee, whose members include former Bank of England Governor Mervyn King, described the Bank as being ‘addicted’ to creating more money. The report’s authors are correct. Whether the Bank can wean itself of its ‘free’ money is crucial. If it cannot, high spending will continue to further fuel inflation and erode the investor trust and confidence upon which the currency is based.

The Romans can teach us a lot about the dangers of high inflation and the importance of investor trust and confidence in a currency. Ancient Rome was ground-breaking, including in the field of financial innovation. It established the world’s first fiat currency, initially as a way of organising the pay of soldiers, before it spread and became common across the empire. Not only was the creation of such a currency phenomenal, but the stability of this currency was as well, so much so that following the fall of the Roman Empire, no currency was as well organised until the 18th century and the British Pound.

Price stability was a key characteristic of the Roman currency. You could travel from Britannia in the west to Judaea in the east and the prices of goods and the value of your coins would be the same. With the exception of some seasonal commodities mostly, long-term prices were stable. This price stability was severely and irreparably damaged by Emperor Septimius Severus (193 to 211AD).

Severus doubled the wages for Roman soldiers as a way of increasing numbers of recruits needed for defensive operations in the east of the empire. As I examine in more detail in my book Pugnare: Economic Success and Failure, this spending increase doubled the overall cost of the army. Lacking the silver and gold metal needed to manufacture the coins required to pay the troops, the Roman mints took to debasing the currency by introducing small deposits of base metal to each coin. Just as today, the increased money supply resulted in inflation and rising prices. Much the same as quantitative easing today, currency debasement eroded confidence in the Roman currency. The fixed exchange rate, set by government decree, between the gold (Aureus), silver (Denarius), and copper or brass coins (Sestertius and Dupondius) that underpinned the trading economy and that relied on trust and faith in the currency was lost. The Romans eventually abandoned their currency and took to bartering for their goods. Throughout the empire trade collapsed and political chaos ensued. It gradually began to break up, with the city of Rome itself eventually being sacked by barbarians in 410AD.

The current rise in inflation of a point or two we are currently facing will not matter in the long term. Just as in Ancient Rome, the key danger comes when investors lose faith in the money and what they are told it is worth. If someone is worried that the £1000 they have tucked away will not be worth as much as in three months’ time, they will go out and spend that money. Increased spending will drive prices up further making existing savings worth less. In the most extreme cases, such as the Weimar Republic in 1923 or Venezuela today, money becomes worthless.

We are obviously nowhere near that, but the lesson is a valuable one nonetheless. It is not inflation itself that will do the damage, it is the knock-on effect on confidence in the currency. Confidence in our currency is crucial – and whatever destroys that will destroy much of what we have.


Dr George Maher is the author of Pugnare: Economic Success and Failure, which explains what Ancient Rome can teach us about the dangers of the sustained ‘printing’ of money, rising inflation and falling investor confidence.

Listen to Dr Maher in conversation with the IEA’s Dr Steve Davies, as part of the IEA Book Club series.

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