A Comparative Examination of Political Institutions' Effect on Economic Growth

 A Comparative Examination of Political Institutions' Effect on Economic Growth

Political institutions play a pivotal role in shaping the economic trajectory of nations, serving as a key determinant in fostering or hindering growth. The complex interaction between political governance and economic development has been the subject of intense debate among economists, political scientists, and policymakers alike. This article aims to explore the varied effects that different political systems—democracies, authoritarian regimes, and hybrid systems—have on economic performance, drawing on historical case studies and empirical data to provide a comprehensive understanding of this crucial relationship.

Understanding Political Institutions

Political institutions encompass the formal and informal rules, policies, and practices that define the way in which political power is exercised and authority is distributed. These structures range from democratic governments, where power is vested in the hands of elected representatives, to authoritarian regimes, where power is centralized, often in the hands of a single leader or a small group of elites. Hybrid political systems combine elements of both democracy and authoritarianism, leading to a more complex interaction between political control and economic management.

Democracy and Economic Growth

Democratic systems, characterized by free and fair elections, rule of law, and protection of individual rights, are often associated with higher levels of economic growth. One key argument is that democracies provide a stable environment that encourages investment by offering protection for property rights and fostering transparency in government dealings. As governments in democracies are accountable to the electorate, they are more likely to implement policies that promote long-term economic growth rather than engaging in short-term populist measures.

Empirical studies have consistently shown that countries with robust democratic institutions tend to experience higher rates of economic growth. For instance, the advanced economies of Western Europe and North America, such as the United States, Canada, and Germany, have prospered under democratic systems that emphasize the rule of law, a free press, and respect for human rights. These nations have been able to build strong institutions that support market-based economies, attract foreign direct investment, and foster innovation.

However, it is important to note that democracy alone does not guarantee economic success. The effectiveness of democratic institutions depends heavily on the quality of governance and the level of political stability. Countries with weak democratic institutions, such as those struggling with corruption, inefficiency, and political polarization, may fail to leverage the potential benefits of democracy, resulting in slower economic growth.

Authoritarianism and Economic Growth

In contrast to democracies, authoritarian regimes often prioritize political control over individual freedoms, with economic decisions concentrated in the hands of a few powerful individuals or political elites. While many authoritarian regimes have achieved rapid economic growth in the short term, the long-term sustainability of such growth is often questioned. China's rise as an economic powerhouse is a prime example of the potential benefits of authoritarian governance, where the centralization of power allowed for swift decision-making, long-term strategic planning, and large-scale infrastructure projects.

Nevertheless, authoritarian regimes face inherent challenges. The absence of political freedoms, such as the right to protest or free elections, often stifles creativity, entrepreneurship, and innovation—key drivers of sustainable economic development. Furthermore, authoritarian systems are prone to corruption, cronyism, and a lack of accountability, which can lead to inefficient allocation of resources, economic mismanagement, and social unrest.

Economic growth in authoritarian regimes may also be unsustainable, as seen in countries like Russia and Venezuela. While these nations have seen periods of economic expansion, the absence of democratic checks and balances often leads to systemic weaknesses, making these economies vulnerable to external shocks, corruption scandals, and poor long-term policy decisions.

Hybrid Systems: A Middle Ground?

Hybrid political systems—those that combine elements of both democracy and authoritarianism—pose an interesting middle ground. These systems, often described as "illiberal democracies" or "competitive authoritarianism," maintain a veneer of democratic processes (e.g., elections and political parties) while limiting the actual power of opposition forces and curbing civil liberties. Countries like Turkey, Hungary, and some Eastern European nations exhibit characteristics of hybrid regimes, where leaders consolidate power through undemocratic means while maintaining some democratic features.

The economic performance of hybrid systems is mixed. On one hand, the centralized decision-making of authoritarianism can lead to rapid economic growth, as seen in some hybrid regimes with strong leadership. On the other hand, the erosion of democratic norms and the suppression of opposition can lead to instability, inefficient governance, and lack of innovation. In these systems, the lack of accountability and transparency can deter foreign investment and inhibit long-term growth prospects.

Conclusion: The Role of Political Institutions in Shaping Economic Outcomes

The relationship between political institutions and economic growth is multifaceted and complex. Democracies generally provide a stable and predictable environment that supports economic growth through the protection of property rights, rule of law, and government accountability. However, the quality of governance within democracies is crucial—without it, democratic institutions may fail to deliver economic benefits.

Authoritarian regimes can foster rapid economic growth in the short term, particularly through centralized decision-making and long-term planning. However, the lack of political freedoms, corruption, and inefficient governance can undermine their long-term economic prospects.

Hybrid systems offer a middle path, combining elements of both democratic and authoritarian governance. While they may achieve short-term economic success, the lack of political freedoms and accountability can lead to systemic issues that hinder sustainable development.

Ultimately, the type of political system matters, but the quality of governance, the rule of law, and the protection of civil liberties are just as important in determining the long-term economic growth of a country. Political institutions shape the environment in which economic policies are formulated and implemented, and their impact on economic growth cannot be overstated.

East asian financial crisis

 n 1997, a financial crisis threw the East Asian economies into a financial chaos that threatened to derail the East Asian economic miracle and engulf the global financial system. In the 1990s, East Asia had become the scene of a new group of economic miracles. From the mid1990s until the outbreak of financial crisis, East Asian countries such as Thailand, Singapore, Indonesia, South Korea, and Malaysia posted real gross domestic product (GDP) growth rates in the 8 percent range or higher (International Monetary Fund, 1997).

Until the East Asian financial crisis, currency crises were often the domain of countries suffering from high inflation, slow growth, large government budget deficits, low savings, and political instability. Unlike the usual candidates for currency crises, the East Asian countries had what economists call “sound macroeconomic fundamentals.” They had high savings rates, low public debts, fast growth and low inflation—the very qualities that win the confidence of foreign investors.

One crack in the foundation involved the structure of corporate finance. Enterprises had relied too heavily on debt financing as opposed to stock issuance. Enterprises do not face bankruptcy when the value of company stock plunges, but they do face bankruptcy when they cannot pay debts. An equally important vulnerability stemmed from the balance sheets of East Asian banks. These banks borrowed foreign capital on a short-term basis to underwrite long-term loans. The short-term nature of the foreign capital inflows left these banks open to a sudden and unexpected reversal from a foreign capital inflow to a foreign capital outflow. A sudden reversal of foreign capital flows made these banks and enterprises illiquid. Much of the foreign debt was denominated in dollars. When the exchange rates of local currencies fell, the real value of foreign debt in local currencies skyrocketed.

The East Asian countries practiced an economic policy that pegged the value of their local currencies to a basket of currencies in which the U.S. dollar played a highly dominate role. The rate at which a local currency could be converted into dollars remained almost constant. This policy shared in making East Asia an attractive haven for foreign capital, but it also was the undoing of these economies. In the late 1990s, the value of the U. S dollar went up, probably because of strong global demand for U.S. financial assets. As the value of the dollar climbed, the values of currencies linked to the dollar, such as the East Asian currencies, also climbed. The appreciation of a country’s currency leaves the exports of that country more expensive in foreign markets. It also makes foreign imports into that country less costly. Falling exports and rising imports left the East Asian economies with current account deficits that needed to be financed by an inflow of foreign capital. East Asian companies began to feel the pain as sales fell off in foreign markets, and domestic sales faced greater completion from imports. In addition, East Asian central banks raised interest rates to increase the attraction for foreign capital. The policy of keeping the local currency exchange rates pegged to the dollar required that current account deficits be financed by foreign capital inflows. Otherwise, the value of the local currency relative to the dollar would sink.

The economic and financial situation in Thailand sparked the crisis. Many currency traders believed that the baht, Thailand’s currency, traded too high, higher than the central bank of Thailand could support.

Thailand’s economy was already suffering from double-digit interest rates and depressed stock prices. Currency traders launched billions of dollars of sell contracts on the baht. Fears of currency depreciation excited a broad outflow of foreign capital, putting more pressure on foreign exchange reserves. In a single day, the central bank spent $500 million dollars of its dollar reserves to keep the baht from falling below its pegged level (Daniels and VanHoose, 1999, 441). In 1997, Thailand’s central bank let the baht float, free to depreciate, which it did.

The depreciation of the baht triggered foreign capital outflows from other East Asian economies. By the end of 1997, Thailand, Indonesia, and South Korea had watched local currencies depreciate about 40 percent relative to the U.S. dollar (Daniels and VanHoose, 1999, 36). 

See also: Currency Crises

Exchequer Orders to Pay (England)

Exchequer orders of payment, which appeared during the seventeenth century, were the first paper money issued by the English government. The orders were what might be called state notes, in contrast to bank notes, which completely displaced state notes as circulating money in England, and later the United States. State notes are issued by government treasuries to finance government spending. Bank notes are liabilities of banks and are secured by the assets and investments of the issuing bank. Virtually all paper money today is bank notes issued by central banks.

In 1667 Parliament authorized Charles II to issue paper orders, or assignments of revenue, to whoever advanced cash or supplied goods to the government. A record book kept a list of the Exchequer orders according to their order of issuance. As tax revenue poured in, the Exchequer redeemed in cash the orders in the same sequence as they were issued. The first order issued was the first redeemed and so on. At first, the government assigned revenue from a particular tax to redeem an issue of orders, but later the government issued orders for redemption out of general revenue.

The Exchequer orders supplemented and eventually replaced tallies, which were the notched wooden sticks split into matching parts. Tallies served the same purpose as the orders but were not as amendable to written endorsements, and therefore were not as suitable as currency. The orders, like the tallies, were negotiable; that is, they were transferable to another party with a written endorsement. This rendered them serviceable as a medium of exchange.

The government issued Exchequer orders to department heads who either paid for supplies with orders or discounted orders to goldsmiths in return for cash. As a loan to the government, orders bore interest, sometimes as high as 8 to 10 percent, a handsome interest rate to goldsmiths who paid depositors as much as 6 percent interest to attract funds for discounting orders. The goldsmiths made a ready market for the orders, rendering them liquid and even more acceptable as money. The orders supplemented the scarce coinage in the English economy and offered an interest-bearing investment in small denominations (20 pounds or so) for the small investor.

In late 1671 the market for Exchequer orders became saturated, even at the high interest rates, and the goldsmiths stopped discounting orders for the government. On 2 January 1672 Charles II issued a proclamation, the infamous Stop of the Exchequer, suspending the redemption of the orders. The goldsmiths were left with vast holdings of unredeemable orders, and many went bankrupt. Interest payments were suspended until 1677. The money owed by the government later became part of the British public debt, but the credit of the British Crown was seriously impaired, and the issuance of Exchequer orders came to an end.

In 1696 the English government began issuing Exchequer bills. These bills paid interest, were acceptable in payment of most taxes, transferable by written endorsement, and convertible into cash on demand at the Bank of England. The popularity of these bills as a form of currency, allowed the government to drop the interest rate to as low as 1 percent per annum. Private banks complained that the bills competed with their own bank notes.

Later, in the eighteenth century, the government’s financing requirements outgrew the small denomination Exchequer bills, around 20 pounds, that were payable on demand. The government opted for bills paying higher interest rates and payable after a fixed time period. These bills were not suitable as a medium of exchange, and bank notes became the only paper money circulating in England.

The experience with the Exchequer orders struck a hard blow against the credibility of state paper money in England. If the Exchequer orders had turned out to be a successful experiment in paper money, England might have developed a monetary system based on state paper money, rather than bank notes.

European Currency Unit

The European Currency Unit (ECU) began in 1979 as what is called a basket currency, a composite currency based upon a weighted average combination of European currencies. It had a predecessor in the European Unit of Account (EUA), which dated back to the 1950s and was used for official transactions between countries. The ECU was similar in concept, but it experienced a totally unforeseen growth in private sector use, suggesting that there might be a strong demand for an international currency. The initials, ECU, were consciously devised as a reference to the ancient French coin, ecu, which was equal to three French livres.

The ECU acts as a unit of account for keeping books and defining the terms of contracts, but does not circulate in the form of a paper currency. The European Monetary Fund kept its funds designated in ECUs. The ECU was an intermediate step toward a common European currency that European Union countries launched in mid-1998.

At its first introduction, an ECU consisted of specified amounts of the following currencies:

• West German mark 0.828
• French franc 1.15
• Belgian franc 3.66
• Luxembourg franc 0.14
• Italian lira 109.00
• Danish krone 0.217
• Dutch guilder 0.286
• Irish pound 0.00759
• British pound sterling 0.9885

Later the ECU basket incorporated the currencies of Spain, Portugal, and Greece. As various currencies were devalued or revalued, the weights were reconfigured accordingly.

ECUs could be expressed in terms of single ECU units or in terms of equivalent amounts of separate national currencies. Member countries of the European Monetary System cooperated to maintain desired exchange rates between individual national currencies and the ECU.

The ECU began as a basket currency, but it soon took on characteristics of an independent currency. A market for ECU-denominated assets developed independently of the market for assets denominated in component currencies, and ECU deposits earned interest, which was often different from a weighted average of interest rates paid on deposits of component currencies. By 1985 ECU transactions in Paris ranked third, after the U.S. dollar and the German mark, and by 1987 ECU futures on the Chicago Mercantile Exchange approached 3 million transactions. Financial assets denominated in ECUs included certificates of deposit, commercial paper, bank loans, and fixed rate and variable rate bonds. Central banks created ECUs for settling payments between individual countries, and private banks bundled individual currencies to create ECU financial instruments as needed.

The ECU represented an important step in the development of a European currency. Presumably with the introduction of the euro in 1998, a European basket currency such as the ECU will no longer serve a purpose.

Eurodollars

Eurodollars come into existence when the ownership of dollar deposits in United States banks passes into the hands of foreign banks. The dollar deposits, more commonly called demand deposits or checking accounts, remain in United States banks, but the owners of the deposits are foreign banks, or foreign branches of United States banks. Individuals in foreign countries have dollar deposits in United States banks, but these deposits do not count as Eurodollars. Dollar deposits owned by foreign banks count as Eurodollars because these banks conduct a business of attracting dollar deposits and making dollar loans. Eurodollar deposits in foreign banks are interest-paying time deposits, usually of large amounts, and borrowers of dollars can turn to these foreign banks for dollar loans.

In the late 1950s European banks first began holding deposits denominated in dollars, and borrowing and lending in dollars. The probable cause of the growth of the Eurodollar market lay with interest rate ceilings in the United States. Regulation Q, promulgated by the Federal Reserve Board, put a legal ceiling of less than 6 percent on interest rates that time deposits could pay in United States banks. The payment of interest rates that exceeded the legal interest rate ceiling in the United States constituted one of the major attractions of Eurodollar deposits. When interest rates soared in the 1970s, foreign banks, not subject to United States banking regulations, were able to pay much higher interests on time deposits, and make dollar loans on favorable terms. In the 1980s the deregulation of United States banking took away some of the competitive advantage of Eurodollars, but the Eurodollar market had already established itself. From 1976 until 1992, Eurodollars grew from $14 billion to $56 billion.

The growth of multinational corporations, major customers in the Eurodollar market, may have contributed to the expansion of Eurodollars. Growth was further facilitated because the Eurodollar market made dealing in dollars a daytime affair in European time zones. Large United States banks also have borrowed funds in the Eurodollar market, and during the cold war, the Soviet government kept dollar deposits in European banks to prevent the United States government from freezing Soviet assets in a political dispute.

London is the headquarters for the Eurodollar market, but Eurodollar transactions take place worldwide. Banks in the Bahamas, Cayman Islands, Canada, Hong Kong, and Singapore hold dollar deposits and lend dollars.

Eurodollars are a subspecies of Eurocurrencies, all of which have extraterritorial markets such as the Eurodollar market. Other important Eurocurrencies are Japanese yen, German marks, British pounds, French francs, and Swiss francs. Luxembourg is headquarters for Euromark deposits, and Paris and Brussels for Eurosterling deposits.

Euro Currency

On 3 May 1998 leaders of the European Union (EU) concluded an agreement to establish a European Monetary Union (EMU) and, on 1 January 1999 to launch a common EMU currency, called the euro. Euro notes and coins will enter into circulation and replace national currencies by 1 July 2002.

Initially, 11 countries have agreed to adopt the euro, Germany, France, Italy, Spain, Portugal, Belgium, Luxembourg, the Netherlands, Austria, Finland, and Ireland. Greece will probably join the euro zone by 2001, and for now Britain, Sweden, and Denmark plan to retain their own national currencies. Some economists have named the new monetary zone Euroland.

The historic agreement to form the EMU provides that responsibility for management of monetary policy in Europe falls to a newly established European Central Bank (ECB). Central banks regulate money supplies, interest rates, and credit conditions, and currently each member of the EMU has its own central bank to manage its domestic monetary policy. A major challenge facing the ECB will be the search for a monetary policy that can meet the needs of such diverse economies as Germany and Portugal. A single European monetary policy will mean a single interest rate all across Europe, regardless of economic conditions in each country.

The president of the ECB will normally serve an eight-year term but the first president, Dutchman Wim Duisenberg, has promised to step down after four years in favor of Frenchman Jean-Claude Trichet. Frenchman Christain Noyer will serve as vice-president of the ECB, and a four-member board, with representatives from Germany, Italy, Spain, and Finland, will oversee the management of the bank. Reaching an agreement on the leadership of the ECB was the last major hurdle to finalizing the agreement.

A common European currency will make transparent differences in wages, labor costs, and prices among European countries, forcing high-cost countries to enact reforms to improve efficiency and lower costs. Uncompetitive countries will no longer have the option of devaluing their currencies, rendering their exports cheaper to foreigners and their imports more expensive compared to domestic goods. The new currency system, by increasing competition between European national economies and coming on line amid an inflation-free recovery, has been spared the fears of currency weakness that might be expected to undercut a new currency without a track record. Also, to bolster the euro EMU countries have five times more gold and currency reserves than the United States.

By increasing cross-border competition and trade, the EMU should economically strengthen Europe in the global economy. European leaders envision that the euro, supported by an economic bloc with more inhabitants than the United States, is well positioned to challenge the dominance of the dollar in the global market place.

Nevertheless, the introduction of the euro has not been met with universal applause. Europe currently suffers from high unemployment rates—in some countries the highest since the 1930s—and much of the blame is pinned on the economic integration of Europe. The euro is seen as a further step down the road of economic integration, forcing companies to undertake more streamlining to remain competitive by laying off more workers. So far Britain, Denmark, and Sweden have remained aloof, fearing the euro will aggravate economic ills and involve some loss of sovereignty.

Equation of Exchange

The equation of exchange identifies the exact mathematical relationship that exists between the money supply, the price level, and the volume of economic activity. The economist Irving Fisher (1867–1947) first formulated the equation of exchange, and his version took the following form:

MV + M′V′ = PT.

Here M stands for the stock of currency in a given year, V stands for the velocity or number of times a dollar bill changes hands during a year, M′ measures the quantity of checkable deposits, and V′ the velocity of checkable deposits. P stands for the price involved in a typical transaction, and T represents the number of transactions.

Contemporary economists make use of a simplified equation of exchange that takes the following form:

MV = PY

Here M stands for a measure of the money stock that includes, at a minimum, currency in circulation plus checkable deposits. Time deposits and other highly liquid assets may also be included. V stands for the income velocity of money, defined as being equal to the money value of income and output divided by the money stock. P stands for the price level and Y stands for real output. In practice PY stands for Gross Domestic Product (GDP) unadjusted for inflation, called nominal GDP, and Y stands for GDP adjusted for inflation, called real GDP. P is a factor standing for the price level and is calculated by dividing nominal GDP by real GDP. Velocity is calculated by dividing nominal GDP by the money stock.

Nominal GDP divided by M equals V, which can be converted to the form MV = nominal GDP. Furthermore, nominal GDP divided by real GDP (Y) equals the price index (P), which is mathematically equivalent to saying that nominal GDP = PY. There fore MV = PY is what is called an identity in mathematics, true by definition.

The equation of exchange is often converted to a percentage change form, expressed as:

% change in M + % change in V = % change in P + % change in Y

A school of economists called quantity theorists assumes that velocity is relatively stable, suggesting that the percentage change in V is always zero. They also assume that the percentage change in Y is at the long-term growth rate of real GDP, approximately 3 percent. With these assumptions the inflation rate (percentage change in P) will always be 3 percent less than the growth rate of the money stock (percentage change in M). If the money stock grows at 10 percent a year, the inflation rate will be 7 percent a year. Therefore, inflation is an exact mathematical function of the money stock growth rate, and the equation of exchange furnishes us with a theory of inflation.

Empirical evidence bears out the close correspondence between money stock growth and inflation, but there is still room for some economists to argue that increases in the inflation rate force authorities to increase monetary growth, instead of the other way around. These issues still stand to benefit from further study.

English Penny

The English silver penny circulated for at least 1,100 years, first appearing in the eighth century, and remaining in circulation until 1820, setting a record of longevity for a circulating coin that has probably never been matched.

At the opening of the eighth century, small silver coins circulated, known to modern scholars as sceattas, and mentioned in the laws of Ine, a local English ruler, as pennies.

The clearest point of departure for a history of the penny begins about a.d. 760 with King Offa, ruler of Mercia, an Anglo-Saxon kingdom in central England. King Offa enjoys the added distinction of being the only English king ever to strike coins bearing the name and bust of his consort. He minted over a million pennies—by some estimates several millions—and he surpassed all of his predecessors in the quality of his coinage, as well as its quantity. Beginning with King Offa’s coinage, the penny remained the only English coin in circulation for 500 years. Initially 240 silver pennies weighed one pound, beginning the history of the English sterling pound.

The weight of the penny probably varied. In 1266 the English government defined a silver penny to be the weight of “thirty-two wheat corns in the midst of the ear.” In 1280 the English government fixed the weight of the penny equal to 24 grains, setting the precedent that makes a pennyweight today equal to 24 troy grains. The 32 grains of wheat were comparable to 24 grains. During the thirteenth century a penny was worth a day’s wages or could buy a sheep. The value of the penny was sufficiently high that the government turned to minting halfpenny coins in the fourteenth century, and three-halfpenny coins in the sixteenth century. The weight of the penny steadily fell until silver pennies struck in 1816 weighed 7.27 troy grains.

In 1257 Henry III minted gold pennies that were worth 20 silver pennies. Per unit of weight gold was 10 times as valuable as silver, and Henry III’s gold pennies weighed twice as much as the silver pennies. The issue of gold coins failed, being too valuable to meet the needs of the English economy.

The word penny may have originated from the word pending, which was the name of a coin issued by Penda, a king who ruled Mercia in the second quarter of the seventh century. Nevertheless, linguistic forms of penny are widely spread with equivalents in Dutch and Friesian. The Danish word for money is still Penge, resembling penig, the Old English word for “penny.” Variants of the word penny may have evolved from an old Danish word for the pans that were used to coin money.

The smallest denomination of coins minted in the United States are called pennies. They are token coins but were formerly minted from copper. The purchasing power of the United States penny is a bit modest to justify the phrase, “a pretty penny,” referring to a large sum of money. Sixpenny nails now denote nails of a certain length, but originally denoted nails that sold for six pennies per 100.

Egyptian Copper Standard

A weight of copper was the unit of account in ancient Egypt before the invasion of Persia and Alexander. Various writers refer to this unit of account as either the uten, or utnu, or deben, or tabnu. Smaller denominations were called the kit, chat, or kedet.

Apparently, copper was hard to come by in ancient Egypt. In the fourteenth century b.c., the king of Cypress wrote to the king of Egypt, informing him that “a present to my brother I have sent as copper (or bronze) is not common in thy midst.”

In ancient languages copper and bronze often share the same word, rendering precise translation difficult. According to the Papyrus Anastasi, around 1200 b.c. a garrison of soldiers in the town of Pa-Ramses in lower Egypt received 100 uten of copper to celebrate the visit of King Minephtah.

Only scanty evidence points to the actual use of copper as a medium of exchange. The one surviving tax record omits any mention of copper on a list that includes gold and silver, hides, apes, chest of linen, staves of cedar wood, and many other commodities. There is some evidence that coiled copper wire served as money in an early period of Egyptian development. An ideograph of a bent wire is the hieroglyphic representation for money. Also the term deben meant “circular,” or “encircling.” Wall paintings depict people weighing metal rings and trading metal rings for goods, but do not identify the rings as copper.

Archeological evidence clearly shows that prices were frequently expressed in copper. An ox brought 119 uten (or deben), and temple workmen earned 5 deben per month and a grain ration. Three deben bought a knife, and 2 deben bought a tanned hide. Although the Egyptians quoted prices in copper, gold may have been popular as a medium of exchange.

Edict of Prices of a.d. 301 (Roman Empire)

The Edict of Prices of a.d. 301 was the most famous government decree enacted in the ancient world to override the economic laws that govern the value of money. At first glance inflation seems to be an upward drift in the prices of all goods on the market. Penetrating the subject more deeply brings one to the realization that the steadily upward trend in prices means that money buys less, that is, money is declining in value. The Edict of Prices of a.d. 301 was an effort to stop inflation with wage and price controls.

The last half of the third century a.d. saw the economy of the Roman Empire swept up in a spiraling updraft of inflationary momentum, triggered by debasement of the coinage. Coins that had 40 percent silver content in a.d. 250 dropped to 4 percent or less silver content by a.d. 270. The government also infused the money supply with a hefty helping of grossly inferior copper coinage.

Diocletian assumed the royal purple in a.d. 284 and ruled until a.d. 307. He first sought to meet the challenge of inflation by reforming the currency—issuing new coins full valued in precious metal. The inflationary surge continued to ravage the economy, robbing the soldiers of purchasing power, and pushing the poor further into poverty while the rich found ways to shield themselves from inflation. Something of the frustration the government felt over the stubborn persistence of the inflation shows through in the wording of the legislation:

If, indeed, any self-restraint might check the excesses with which limitless and furious avarice rages—avarice which with no thought for mankind hastens to its own gain. Since, however, it is the sole desire of unrestrained madness to have no thought for the common need and since it is considered among the unscrupulous almost the creed of avarice, selling and rising with fiery passions, since, as a guide, fear is always found the most influential preceptor in the performance of duty—it is our pleasure that anyone who shall have resisted the form of this statute shall for his daring be subject to a capital penalty. Nor is he exempt from the same penalty who believes that subsequent to this regulation he must withdraw them [commodities] from the general market, since the penalty should be even more severe for him who introduces poverty than for him who harasses it against the law.

(Frank, 1940, Vol. 5)

The edict set maximum prices for a detailed list of goods, and wages for a range of skills from architects to stonemasons. Those who sold goods above the maximum were subject to the death penalty. The same punishment awaited buyers who conspired with sellers to pay prices above the maximum, and sellers who hoarded goods to avoid selling them at legal prices.

The edict failed miserably. Sellers hoarded goods, and production fell off. Diocletian eased the restrictions of the edict, which Constantine revoked completely. The language of the edict sounds familiar tones that often are heard when government policy fails to tame inflation, and governments turn to wage and price controls out of frustration.