This article is excerpted from chapter 9 of The Rise and Fall of Society.
Dionysius, the storied tyrant of Syracuse, was a consummate financier. His gift stood him in good stead on the day he found himself in bankrupt condition, having borrowed from the citizenry more than he could repay.
He might have increased taxes and satisfied his creditors with their own money, but he did not do so because, presumably, his levies had reached the point of diminishing returns; an increase could have discouraged production, or caused a flight of capital, and thus dried up the source of his income. That would not do.
And yet, the debts had to be met, since repudiation would have blemished his reputation and impaired the national credit; no one would have lent him a plugged Syracusan dime thereafter.
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In this predicament, Dionysius worked out a scheme that has come to the rescue of national profligacy ever since. He called in all the coin of his realm, known as drachmæ, restamped them so that each drachma became two, and, after paying off his debts with the revalued money, returned to the owners many more drachmæ than they had been obliged to turn in. No doubt, the Syracusans were delighted by the operation; their advances to the tyrant were paid up in full and their nonmonetary assets had suddenly doubled in price. He deserved praise for this financial feat.
In twenty-two centuries men do a lot of thinking, and out of this cerebration come new ways of doing old things. Like Dionysius, latter-day politicians sometimes find themselves without the wherewithal needed to defray the costs of glorious State adventures and, having stretched taxation to the breaking point, resort to borrowing. They convince the citizens not only that their savings will be spent in ways that will redound to their benefit, but that they will be rewarded for their faith with an annual increment; the imposingly printed receipt issued to the lender solemnly pledges the honor of the State to that effect. Now, in one way or another, these receipts become monetized, and Society is deluged with new coin of the realm, even as were the Syracusans when their drachmæ were restamped. Everybody is "enriched."
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This modern financial wizardry is a vast improvement on Dionysius’s method in that it conveys the impression of an honest business transaction, not a swindle. Evidently, Dionysius had not thought of this receipt business, for if he had he would never have found himself in the aforesaid predicament. He would never have been faced with bankruptcy. For, among its other advantages, this modern receipt bears a maturity date, usually falling in the next generation, to the relief of the immediate borrowers; furthermore, through refinancing and funding methods this date acquires the unique capacity of extending itself into eternity, so that the loan need never be repaid. On the other hand, the lender or his offspring can always be sure of receiving interest, since as a taxpayer the holder provides the funds.
We have no doubt that Dionysius’s ministers fortified him with a learned dissertation on the virtues of his restamping scheme. His modern counterpart not only has ministers to advise him but also professors of economics to explain to the public how the abundance in their pantries is improved by inflation.
This appreared on Mises.org.