Rich Nations That Went Broke By Spending Too Much
Government spending drives taxes, deficits, debt and inflation, so it’s at the core of our economic problems. What to do about runaway spending? The tendency is to imagine that it might be controlled by electing the right politicians, enacting a law like a balanced budget amendment, passing a spending limitation ballot initiative, establishing a super committee or coming up with some kind of “grand bargain.”
These and other well-intended strategies have failed, primarily because they were attempts to have politicians act against their self-interest. Politicians generally want more power which means more money, more laws, regulations and bureaucrats. Historical experience suggests that rulers - whether kings, dictators or elected politicians — have a visceral urge to spend money they don’t have. They can’t control themselves. They’ll weasel their way around any efforts to put a lid on the cookie jar. This is why rich nations like Japan, Saudi Arabia and the United States are spending money they don’t have and incurring chronic budget deficits.
All of this has been has been going on for a very long time, a reminder that we’re dealing with one of the most potent forces in politics. Runaway spending repeatedly has contributed to the downfall of the high and mighty.
For example, spending problems began to be evident in the early years of the Roman Empire, and they became huge in the third century C.E. Perhaps as early as the third century B.C.E., Rome began minting a gold coin that came to be known as the aureus. Originally the face value of the coin equaled the market value of gold in it.
Then gangster rulers spent money they didn’t have on grain subsidies, public entertainments, a gigantic bureaucracy and military establishment. These rulers relentlessly raised taxes and debased money, crippling the economy. They tried to pay their bills by debasing the aureus. They issued gold coins that had the same face value but less and less gold. In 81 B.C.E. (when Sulla ruled), the aureus had 10.9 grams of gold, but this declined to 9.09 grams in 50 B.C.E. (Pompeius), 8.18 grams in 46 B.C.E. when Caesar ruled, then 7.80 grams in 15 B.C.E. (Augustus), 7.27 grams in 60 C.E. (Nero), 6.55 grams in 214 C.E. (Caracella), 5.45 grams in 292 C.E. (Diocletian), 4.54 grams in 312 C.E. (Constantine) and 3.29 grams in 367 C.E. (Valentinian).
There was inflation: prices increased as merchants demanded more coins for their goods (a higher total face value), to assure that their payment in gold would be the same as before. Rome’s silver coin, the denarius, was similarly debased. Monetary chaos, with so many coins circulating that weren’t what they appeared to be, contributed to economic chaos, a major factor in the fall of the Roman Empire.
Chinese rulers introduced paper money sometime after 960 C.E. Evidently they soon discovered they could acquire their favorite luxuries and pay their armies by printing more money, and they did it with gusto. In the late 13th century C.E., the Venetian merchant and chronicler Marco Polo - with little knowledge of China’s past experience — marveled at the brilliance of the Mongol ruler who “may truly be said to possess the secret of the alchemists.” He persuaded merchants to give him wonderful things, and all he offered in return were stamped pieces of paper made from the bark of mulberry trees. It was a nice racket. Unfortunately, people realized that paper money lost value as prices took off, at which point everyone tried to avoid it. To keep the paper money game going, some rulers decreed the death penalty for malcontents who wouldn’t accept it.
A dynasty’s paper money was wiped out when, as eventually happened, the dynasty was defeated by invaders or rebels. The new rulers issued their own paper money that, like its predecessors, was depreciated and wiped out. Altogether, seven Chinese dynasties issued paper money. Occasionally new paper money was exchanged for old at rates up to 1,000 to 1 (old-to-new). Chinese records show that the money supply soared more than 3,200-fold between 1260 and 1330 C.E. During this period, inflation was a factor in the collapse of the Song and Yuan dynasties. Next came the Ming dynasty that introduced its own paper money, but reportedly it lost 99 percent of its value by 1425. Then the Ch’ing dynasty tried paper money, but it lost all its value in 11 years. The Ch’ing dynasty tried paper money again, but it became worthless in only 8 years. Runaway inflation was a factor in the collapse of Chiang Kai Shek’s struggle against Mao Zedong’s communists in 1949.
England, where industrial prosperity first began to develop, had a series of spendthrift sovereigns. The most reckless of these was probably Henry VIII (ruled1509-1547). This was the royal who married six times. He spent huge sums on his palaces, on his legions of government employees, on the British Navy and on wars against France. Biographer Derek Wilson noted that due to inconvenient tax resistance, “the King’s needs and wants could not be simply furnished by going to the people [for more revenue].”
Henry VIII enjoyed windfall gains from confiscating Catholic Church properties in England, but he found himself in financial trouble again. He resorted to the old trick of issuing coins with less gold or silver content than was indicated on the face of the coins - the “Great Debasement” as it was called. The king was broke. Ironically England’s first bankruptcy law was enacted during his reign, to protect creditors.