Peterson's Law of Inflation

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First published
in National
Review, December 19, 1959.

Money! For
some it’s a woodpecker’s scalp, for others a gold doubloon. But,
says the author, this is common to all money. As it multiplies in
volume, it decreases in value.

money," commented a visitor in our earshot at the Chase Manhattan
Bank Museum of Moneys of the World in New York’s Rockefeller Center.
The visitor, a Texan we surmised from his drawl, height, and wide-brim
Stetson, was referring to a display of Yap stone money. One Yap
specimen measures some thirty inches in diameter and weighs about
175 pounds. It is worth ten thousand coconuts or one wife, or so
the sign read.

Funny money
is right, we mused, but not for the reason that seemed to catch
the eye of most of the sightseers and what we guessed were a few
stray numismatists. They were fascinated by the bizarre in money:
the tiny gold coin, little bigger than a pinhead, from India; the
large copper coin weighing 31 pounds from Sweden; the Joachimsthaler
coin minted about 1520 in Bohemia, the ancestor of the American
"thaler" or, later, dollar; the "genuine" American
wooden nickels; money old and new, money in big denominations and
small, money in assorted shapes and materials — money made of metal
and paper of course but also made of salt, of grain, of fish hooks,
of musket balls, of cacao seeds, of brick tea, even of woodpecker

Still, what
intrigued us was the evidence of inflation demonstrated by the museum’s
better than 75,000 specimens of ancient and modern money. Some fifty
centuries of inflation, we’d say. The progressive and quite unrelenting
disappearance of silver in the content of the denarius coin of Rome
(the penny of the New Testament) for example. (Thinning out the
silver content leads inexorably, we figured, to the multiplication
of volume of money and its loss of value. This is the way with Inflation
— multiplication is what is sought under the theory that money is
wealth but it is division that, unintentionally, results.)

At any rate,
according to a reference work we found in the museum, the denarius
issued by Augustus was, save for a bit of hardening alloy, pure
silver — i.e., its silver content was practically 100 per
cent. Yet by Nero, in 54 A.D., the silver content of the denarius
had slipped to 94 per cent; by Vitellius, in 68 A.D., to 81 per
cent. By Domitian, in 81 A.D., it had climbed to 92 per cent; by
Trajan, 98 A.D., up another notch to 93 per cent; but by Hadrian,
117 AD., it had again wended its way down, to 87 per cent; by Antoninus
Pius, 138 A.D., to 75 per cent; by Marcus Aurelius, 161 A.D., to
68 per cent; by Septimius Severus, 193 A.D., to 50 per cent; by
Elagabalus, 218 A.D., to 43 per cent; by Alexander Severus, 222
A.D., to 35 per cent; by Gordian, 238 A.D., to 28 per cent; by Philip,
244 A.D., to 0.5 per cent; and by Claudius Victorinus, 268 A.D.,
to 0.02 per cent. Then came Diocletian’s famous answer to inflation,
his price-fixing edict of 301 A.D., replete with very sharp teeth
for price-breakers. It didn’t work; Inflation persisted. And anyway
Rome was out of business before long.

Not So Sterling

So much for
the Roman penny. What of the English penny, originally struck of
sterling silver? It is the same sad tale. Another reference work
at the museum bespoke of the same trend of decline of silver content.
For King John, of Magna Carta fame, the English penny (for which
the British today still use the symbol "d," referring
to the time Britain was under Rome when "d" stood for
denarius) contained 22 grains troy of silver. But by Edward I,
1275 A.D., silver content was down to 22 grains; by Edward III,
to eighteen grains; by Henry IV, 1412 A.D., to fifteen grains; by
Edward IV, 1464 A.D., to twelve grains; by Henry VIII, 1526 A.D.,
to eleven grains; in 1544, still under Henry VIII, to ten grains;
by Elizabeth I, 1560 A.D., to eight grains; in 1601 A.D., still
under Elizabeth I, to 7.8 grains; and by George m, 1790 A.D., to
7.3 grains. To sum up English inflation, it might be pointed out
that the London price of gold from 1250 A.D. to 1950 A.D. rose from
seventeen shillings per fine ounce to 250 shillings per fine ounce.
The persistent shrinkage of silver content in the English pound
sterling, from literally a pound of silver to but a fraction of
a pound today, we also noted.

Blame Herr

But the museum
bespeaks a dichotomy of inflation: metal and paper. The split harks
back to the invention of movable type (circa 1440 ~A.D.), Herr Johann
Gutenberg’s gift to money-making machines, legal and illegal, which
made previous inflation techniques — alloying, clipping, sweating,
over-stamping, and so on — appear crude and amateurish. After Gutenberg
a simple order in the dead of night, in any tongue, "Psst.
Roll ‘em!" to the fellow at the mint, and a beautiful stream
of newly-printed currency would issue forth, endlessly, or so it

Plenty of evidence
of paper money inflation is on display at the museum. John Law’s
"Mississippi Bubble" money. American Continentals of the
American Revolution ("Not worth a Continental"). Assignats
and mandats of the French Revolution. A Chinese 500,000 yuan note
(1947 A.D.), quite irredeemable. A German 100 billion mark Reichsbanknote
(1924 A.D.), which some Germans used for wallpaper. A Greek one-trillion
drachma note (1944 A.D.). A Hungarian one-hundred quintillion pengo
note (1946 A.D.) — that’s twenty ciphers or 100,000,000,000,000,000,000
pengoes, worth at the time less than one U.S. cent. It’s all a bit
embarrassing, this bearing witness to monetary hanky-panky in glass

The Shrinking

The Texan circled
our way again. "Get a load of the figure on this money,"
he said to his companion as they stood before the Hungarian note.
"Just like the prices I paid in Paris." He mentioned six
hundred francs for a shave and haircut, fifty-five hundred francs
for a room and bath, and "ten grand for a night on the town."
He pushed his Stetson to the back of his head. "You need one
of those IBM machines to figure out where you stand after a week
in Paris," he said. He also mentioned that the "spenders"
in Washington could learn something from their Parisian counterparts;
in Paris, he explained, public budgets are not measured in billions
but in trillions.

The talk jibed
with the French francs on exhibit. The 1914 franc officially exchanged
at five to the dollar. The 1945 franc, however, could be had at
fifty to the dollar. Between the two World Wars, in other words,
the franc shrank from twenty cents in worth to two cents, a 90 per
cent loss in purchasing power for French citizens. But today’s franc
exchanges for just under five hundred to the dollar, a 90 per cent
loss compounded on a 90 per cent loss. The franc has sunk to a worth
of one-fifth of a U.S. cent (and the U.S. cent, too, is no longer
what it used to be). But the descent of the French franc will be
reversed — voil — by fiat effective January 1, 1960. On and after
that date only "heavy" francs will circulate. A new "heavy"
franc is equal to one-hundred "old" francs. "Heavy"
francs ease calculation and presumably return some prestige to the
franc. Some "heavy" francs are already in circulation,
and we asked a museum official if Chase Manhattan had one we could
see. It did, a one thousand franc note issued by the Banque de France,
with the usual fine engraving, heroic pictures, and multi-colors
of French currency but overstamped in red ink CONTRE-VALEUR DE 10
NOUVEAUX FRANCS. We wondered when a heavy-"heavy" franc
would go on display.

For a theory
of inflation hit us as we poked around the museum, the theory that
inflation is more than a peculiar way of life — it’s a law of life.
The ancient Babylonians and Greeks inflated; the modern Brazilians
and Soviets inflate. Inflation, like sin, is always with us. Every
money in every age, we reflected, inevitably undergoes inflation
— a multiplication of volume and a division in value — sometimes
at a crawl, sometimes at a gallop, but progressive inflation nonetheless.

The Evaporating

In retrospect,
the French franc has been galloping, and relatively, the American
dollar has been crawling. Yet the crawl has been fast enough. We
looked at a glass-enclosed Federal Reserve note in the amount of
ten thousand dollars, Series 1934. In 1934 that note bought ten
thousand dollars worth of goods and services. But now that same
note buys just about four thousand dollars of goods and services.
Poof! It’s gone — six thousand dollars of lost purchasing power.
So that’s our new-found law of money; money multiplies in volume
and divides in value over the years. Money, like water, evaporates
over the hot sands of time.

But why inflation?
We scanned the exhibits once more for clues to the Why of what was
plainly becoming Peterson’s Law of Inflation. Perhaps we found one.
Whether paper or metal, on each currency unit we confronted symbols
of government. A royal picture, a crown, a flag, a national emblem,
a finance minister’s signature, and on the paper money the frequent
phrase, "The Government of… will pay to the bearer on demand…"
But pay what? Not gold — that went out with rumble seats. Pay only
less and less, according to Peterson’s Law. But could governments
be at the root of the problem? If so, what is it in the nature of
government that makes it partner to inflation? Historically, we
thought, governments have been the big spenders and debtors. And
it’s well known that debtors are not usually averse to borrowing
dear and repaying cheap. For example, a couple of millennia ago
Dionysius of debt-ridden Syracuse astutely called in all drachma
coins of Syracusean issue, doubled their face value by over-stamp,
and used half of the new coins to discharge the public debt with
a handsome 50 per cent profit.

It’s plain
the record of governments and their trusteeship over money gives
one no great feeling of trust. As Harry Scherman, board chairman
of the Book-of-the-Month Club, sums up his study of promises by
governments to pay up their debts honestly and of government monetary
management in general (The
Promises Men Live By
, p. 362): "Government, it
might be said, is the one area of human activity that constitutes
the last stronghold of scoundrelism in human nature."

But still,
would governments consciously inflate against their own citizens?
The thought was too dismal, the theory too disconcerting. We never
got to check out the connection, if any, between inflation and public
debts, for we left the Museum of Moneys of the World — that monetary
graveyard — for the purer air and traffic of New York’s Sixth Avenue
and fished in our pockets for a fifteen-cent subway token to take
a ride that had cost a nickel not so long ago.

4, 2006

Peterson [send him mail]
is an adjunct scholar at the Ludwig von Mises Institute.

H. Peterson Archives

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