What destroys prosperous societies and civilisations?
I can hear you say war, famine, natural disasters, or just downright bad governance.
You’re right… but not entirely.
Very often, there is a hidden hand at play. A hidden hand that is unseen, unglamorous, and doesn’t make for a good story, but is nevertheless pernicious and all-devouring. It is akin to a swarm of leeches that suck on the lifeblood of a civilisation, slowly draining it, until it becomes a pale shadow of its former, resplendent self.
This dastardly swarm of leeches that is seen nowhere but felt everywhere is called inflation.
To fully understand how inflation sets in like a gangrenous pus, eventually leading to economic and societal decay, even collapse, let’s go on a journey through history to look at some examples of occasions when it happened – and it happened often.
It’s just unfortunate that we often fail to heed these lessons – until it’s much too late.
The Rai Stones of the Yapese
The Yapese are the inhabitants of the island of Yap, now part of the Federated States of Micronesia – just east of the Philippines. A few hundred years ago (the exact year is unfortunately lost to the vagaries of history), they used the Rai Stones – large doughnut shaped stones – as a primitive form of money.
These ranged from a few centimetres in diameter to ones that were a few metres and weighed around 4000 kgs each. What made them special was their scarcity – they weren’t native to the island of Yap but instead had to be quarried in the neighbouring island of Palau.
Enamoured with both the Rai Stones’ marble-like appearance and the difficulty of procuring it – quarrying and transporting it was energy, labour and resource intensive – they chose it as their money.
For centuries, the Yapese thrived, with the Rai Stones serving as hard money, since the difficulty in procuring it meant new supplies couldn’t be brought in at a fast enough rate to cause any meaningful inflation.
However, in 1871, that all changed when an Irish-American captain by the name of David O’Keefe, who was shipwrecked on Yap saw an opportunity to quarry Rai Stones much faster using modern tools and explosives that he had access to.
Using this, he was able to inflate the Rai Stones’ supply and in time, it failed as money, and in the process gradually decimated their economy.
It is now only used ceremonially in memory of its once-prominent role as hard money.
The Aureus coin of the Romans
Around the first century BC, Julius Caesar, the emperor of the powerful Roman empire, in an attempt to have a form of money that was saleable across different, disparate regions, created the aureus coin, which contained around 8 grams of gold. This greatly facilitated trade and was widely accepted as money, thanks partly to which there was a roughly 75-year period of economic stability.
However, as the notorious emperor Nero took charge decades after the death of Julius Caesar, he introduced the act of coin clipping, whereby he would collect the coins of his citizens and clip them. The clipped parts would then be melted down and minted to have less gold content.
The ramifications of this reduction in the value of the coins weren’t felt immediately as the charade could go on as long as Rome kept conquering new lands and dispossessing the people there of their wealth.
In addition to debasing the currency, emperors who came after him also employed price controls on essential food items, earning their populations’ adulation and support. This encouraged those working in the countryside to move to Rome where they could live a highly subsidised life without doing much work.
But of course, we live in a finite world with finite resources. When there wasn’t more land in close proximity to plunder and more external riches to conveniently loot, these emperors were forced to further devalue their coins, which acted as a regressive tax on the population, transferring the wealth of the peasants to the ruling class, and allowing them to enjoy the lavish lifestyle they were accustomed to (the mechanics of which are explained in this article).
This series of currency debasements saw the aureus going from its original 8 grams of gold to 7.2 grams, then to 6.5 grams, and then eventually to 4.5 grams. In addition to other things, this vicious cycle of currency devaluation over the decades – aided by other factors – eventually led to the decay and decline of the once-mighty Roman empire.
The Mark of Weimar Germany
While the first two examples above demonstrated the effects of consistently increasing inflation, the happenings in Weimar Germany in the early 1920’s were one of shocking hyperinflation. And it was even more pronounced considering the prosperity it enjoyed just a decade prior.
In 1914, before World War 1, Germany was a wealthy nation with a gold-backed currency, meaning the value of the paper currency was backed one to one to the gold reserves of the country. At this point, four to five German Marks could be exchanged for a US dollar. It was also around the same rate as the British shilling and the French Franc.
But just nine years later, in 1923 and at the height of its hyperinflation problem, a single US dollar was equivalent to one trillion Marks. This was due to the reparation payment that was levied onto it by the Allies after Germany lost World War 1.
Since it couldn’t afford to pay the huge sum back, Germany had taken the Mark off the gold standard and started printing money at record rates to bankroll this repayment. This of course, had the predictable effect of causing hyperinflation, eventually leading to massive social and economic unrest.
This led to one of the most consequential events in modern history. The devious leader of the Nazi party, Adolf Hitler jumped at this opportunity to drill home his message of nationalism and German superiority. Mesmerised by his charisma and drawn in by his powerful message, the German people gave him the reins of the country and the rest, as they say, is history.
The Bolivar of Venezuela
In 1950, Venezuela was the fourth largest economy in the world, at which point it was four times richer than Japan and 12 times richer than now-mighty China. This was all thanks to its incredible oil reserves – even now the largest in the world, beating out oil giant Saudi Arabia.
Until the 1980’s it maintained steady growth and was the most prosperous nation in Latin America. However, this was not to last as its economy, which was heavily reliant on oil (96% of national earnings) saw the price of its most prized asset fall due to the global oil glut.
This crippled the economy, driving the government to try to print their way out of the problem. But as we’ve seen plenty of times in history, this only exacerbates the problem, eventually decimating the economy and its productivity.
By 2016, this overprinting of the Bolivar caused inflation to hit 800%, and then in 2018 to hit a mind-numbing 80,000%. In 2021, Venezuela was occupying the 92nd spot in the list of economies of the world, down from being the fourth largest.
The current situation
Money manager and economics commentator George JW Goodman once wrote: “All money is a matter of belief. Credit derives from Latin credere, ‘to believe’. Belief was there, the factories functioned, the farmers delivered their produce. The Central Bank kept the belief alive when it would not let even the government borrow further.”
But the problem today is that central banks around the world are consistently printing money and allowing private banks to borrow further, thereby increasing the money supply.
And as can be seen from the examples above and countless others – including more recently Zimbabwe and Turkey – this is a recipe for disaster, as rampant inflation almost always occurs in countries that have a currency that can be printed at will, and hence debased.
This was made amply clear by economists Steve Hanke and Charles Bushnell who found 57 cases of hyperinflation in history (50% increase in prices within a month), all of which occurred in nations with government-issued, asset-unbacked fiat currencies.
And as history shows, rampant inflation eventually leads to societal and civilisational degeneration and collapse. And as I argued in my first article in this series, with inflation at around 7% currently, and with no signs of abating, Malaysia could be heading in the direction of these failed economies, albeit at a slower pace.
Is there no fix for this? Is there no way to turn the ship around?
Maybe there is.
Next Monday: A potential solution to our inflation problem.
This column is part five in a six-part series on inflation
Part 1: Inflation is killing your future
The writer can be contacted at [email protected].
The views expressed are those of the writer and do not necessarily reflect those of FMT.