Peterson's Law of Inflation


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.

"Funny 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 scalps.

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 Gutenberg

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 seemed.

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 cases.

The Shrinking Franc

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 Dollar

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.

November 4, 2006