Geoff Gannon December 18, 2006

On Gold and Rome

Over the weekend, Bill Rempel put up an interesting post entitled “Not Bullish on Gold”.

Bill makes two important points early in his post:

1) Gold is not “original money”
2) When a government controls money, it will manipulate the situation to its advantage

Inflation is not a modern phenomenon; it is a governmental phenomenon. Many otherwise intelligent people completely miss this point. For those investors with more knowledge of history than economics, Spain’s experience with New World gold probably stands out as a clear example of inflation. That’s good, because knowledge of two or more separate occurrences of the same phenomenon under seemingly different conditions is often the key to better understanding that phenomenon.

There’s another excellent example of inflation that is rarely studied. It happened roughly two thousand years ago in Europe, Africa, and the Middle East.

If you have any interest in inflation during Roman times, I’d recommend Kenneth Harl’s Coinage in the Roman Economy, 300 B.C. to A.D. 700 (Ancient Society and History). I should warn you this book was not written to address inflation specifically or even economics generally. It certainly sheds some light on those topics, but the subject of the book is exactly as the author describes it on page one:

“The objective of this book is an examination of how the Romans used coined money – its role in payrolls, tax collection, trade, and daily transactions – over the course of a millennium, 300 B.C. to A.D. 700. Although there are many books about Roman coins, they are, for the most part, numismatic works devoted to the study of coins as objects rather than as evidence for the economic and social life of the Roman world. This is an attempt to redress the imbalance by dealing with coins both as fiscal instruments of the Roman state and as the medium of exchange employed by the Roman public.”

I find this stuff interesting. If you do too, read the book. However, if your only interest in Roman monetary history is better understanding inflation (in modern societies), you’ll want to skip the book – but learn the history. I can’t cover Roman monetary history in a single blog post; however, I will try to touch on some highlights that relate to Bill’s post.

The first point worth mentioning is that Rome’s early monetary history clearly demonstrates that gold is not “original money”. Early Italian people used iron and bronze as money long before adopting gold. Before that, they may have reckoned prices in cattle.

In fact, Pliny the Elder wrote that the first forms of money (pecunia) were actually substitutes for cattle (pecus), and that’s where the Latin word pecunia came from. There may be some truth to this, as the English word “fee” is believed to be derived from a German word for cattle, which is itself quite possibly a cognate of pecus. Clearly, there was some connection between cattle and wealth in these societies; however, it’s debatable whether cattle really qualified as “money” as we understand the term today.

There’s no doubt the Romans used bronze as money. In fact, they used it much as later societies used gold – they weighed it, shaped it into bars, and cut it to form standard units (such as a pound). Originally, there was no intention to use bronze as coinage. But, adjustments to make bronze bars more convenient to ship and store lead the various Italian communities in that direction.

For simple day-to-day transactions, the Greek Sicilians found silver to be too difficult to use (the coins would have to be truly tiny). So, they opted for bronze coinage instead. At first, the non-Greek peoples of Italy simply stamped metal bars with crude designs.

Eventually, the Romans divided these bars into discs. Naturally, these stamped discs started to look a lot like Greek coins. Despite these rather humble beginnings, Roman coinage would become the dominant currency of the Mediterranean world.

Both the Romans and the Etruscans had plenty of experience dealing with Greek and Carthaginian traders. Yet, they didn’t immediately adopt silver or gold coinage. Why not?

There are two possible explanations. A passage from Harl’s book touches on both:

“Italians, long after Greeks had arrived carrying the first true silver coins, conducted exchanges by weighing out bars or lumps of bronze…and converting the weight into local units…Etruscan towns, the most sophisticated centers in Italy during the sixth and fifth century B.C., never struck gold or silver coins even though they had extensive trade with the Greeks and Carthaginians. Etruscans reserved gold and silver, which were costly metals imported from Central Europe or the East, for plate and jewelry.”

The two best explanations for the Romans’ reluctance to strike silver or gold coins are that Rome had no readily available source of either metal (before the Punic Wars) and the Romans had a cultural bias against making coins from silver or gold. The latter point may be hard for us to swallow, but I believe there’s some (small) truth to it. The Republic was quite reluctant to strike gold coins. In fact, as odd as it sounds to us today, Cicero specifically condemned bribing soldiers with gold coins rather than silver ones.

The most telling piece of evidence may be when gold coins were first struck in large numbers – during the civil wars. Lump sum payments to troops were common. The generals called these “gifts”. We might call them bribes – especially since these men were participating in a civil war. Regardless of what you call them, the payments made were huge.

To put these “gifts” in perspective, consider this fact: Caesar distributed one of the largest lump sum payments during the civil war in gold coins. To make a gift of equal value in silver rather than gold, Caesar would have needed just over fifty pounds of silver per soldier. While I’m sure they would have appreciated the gesture, a gift of fifty pounds of metal can be a bit unwieldy.

Making the “gift” in gold rather than silver greatly reduced the weight per soldier and (more importantly) was a far less challenging logistical task. However, with the influx of gold from his campaign in Gaul, Caesar may have inadvertently caused the (silver) price of gold to plunge by as much as 25%.

Once again, this demonstrates that gold is not some sort of “original money”; but, rather is controlled by the same forces that set exchange rates between any two goods (in the absence of a single, common currency).

Until the Roman mints set a standard of 1,000 silver coins to a pound of gold, the prices of the two metals freely fluctuated – there was a silver price for gold and a gold price for silver. Once the government standardized the system, every coin (in every metal – gold, silver, and bronze) was exchangeable at fixed rates into every other coin. The silver denarius acted as a “link coin against which all other coins, including provincial and civic ones, could be reckoned and exchanged”.

This state sponsored system had a gold-to-silver ratio of approximately 12. That ratio was quite consistent with the freely fluctuating ratios that had existed in the Mediterranean economy before the fall of the Roman Republic.

Of course, the Roman ratio was nowhere near as high as the current gold-to-silver ratio. That doesn’t necessarily mean gold is overvalued now or was undervalued then; it simply means gold is not economically as special a substance as many consider it to be. Gold’s value is dependent upon the particular circumstances of its extraction and distribution as well as demand, which is ultimately a psychological factor that can change over time.

On this last point, it’s worth noting that the Romans used gold somewhat differently than we do today – and certainly viewed the metal quite differently than we do.

When we think of gold, we often think of international commerce. The thought of gold didn’t conjure up similar images in the minds of Romans. In the ancient Mediterranean economy, silver was at least as important to commerce as gold was.

Before Caesar’s conquest of Gaul and confrontation with Pompey, silver probably served a more important role in facilitating Mediterranean trade than gold did. Both the Greeks and Romans used silver when trading. Before the fall of the Republic, the most well-known coins in the world were probably silver coins rather than gold ones.

Gold didn’t grease the wheels of commerce; it greased the wheels of war. Gold was brought to Rome as plunder and paid out to soldiers to buy their loyalty. It was the metal a grateful provincial city presented as a “gift” to the Emperor and it was the metal a grateful emperor presented as a “gift” to his soldiers. Our idea of gold wasn’t their idea of gold.

There’s nothing natural about the association in our minds between gold and eternal wealth. Seeing a yellow bar of gold and feeling wealthy isn’t really all that different from seeing a red can of Coca-Cola and feeling happy. The association is in your mind; it’s not in the metal.

However, gold does have some “intrinsic value” apart from the opulent images it conjures up in your mind. Gold has a great advantage over most other goods when used for large, face-to-face transactions.

The metal is prevalent enough to allow for extraction and circulation on a wide enough scale to gain general acceptance within a society. At the same time, it is rare enough (and difficult enough to obtain) that large, face-to-face transactions where one party will not accept paper money, an I.O.U., etc. are possible because you don’t need a prohibitively heavy supply of the metal to conduct a fairly large transaction.

In Roman times, this was a great advantage. Today, it’s an almost meaningless advantage. Truly large scale transactions are almost never conducted face-to-face. Today, nearly pure gold is not widely available in coin form and exchangeable (within minutes) into various forms of money, goods, and services at any place of commerce – as it was in Roman times.

Here, it’s worth mentioning that “imperial coins…commanded premiums in the marketplace because the purity of most bullion fell short of that of coins.” If you combine unquestioned purity with widespread public faith and unsurpassed liquidity, you have an excellent form of money – provided you can mint enough of it.

Today, there’s widespread public faith in the dollar (for use in transactions) and it’s the most liquid asset you can hold. But, it’s just paper money. On the other hand, the American public has less faith in gold (as a medium of exchange) than in the dollar, because dollars can be transformed into goods almost instantly, while gold is a hassle to hold or exchange.

Today, gold only fulfills one function of money adequately – it serves as a store of value. But, does gold really provide any advantage over real estate, stocks, and other productive assets in this regard?

Certainly, gold can act as an alternative to such assets. Of course, other commodities can serve as alternative assets as well. At times, gold may be able to serve as a complement to more productive assets for individuals who can afford to store their wealth in a diverse group of investments. But, that doesn’t make gold special.

Gold is an asset. It can be overvalued or undervalued just like a share of Microsoft, an ounce of silver, or an acre of timberland.

Note: Quotes are from Kenneth Harl’s Coinage in the Roman Economy, 300 B.C. to A.D. 700 (Ancient Society and History).