Mises Daily Articles
Mariana Fights Inflation, 1605
Although its form has changed over the years, inflation has been with us since at least the days of ancient Rome. Inflation then was accomplished by debasing the currency, a process that involved reducing the amount of precious metal in coinage without changing the legal value of the coins. The removal of silver from US coins in 1965 is a recent example of inflation by debasement.
With the advent of paper fiat currency, inflation occurs by printing more money or by increasing and easing the availability of credit in the banking system.
The Federal Reserve admitted as much, possibly unwittingly, in its most recent Open Market Committee meeting announcement when speaking of its efforts to ensure economic growth by the "substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity…"
Whether inflation occurs by easing monetary policy or by removing precious metal from coinage, it is always and everywhere fraudulent and immoral, for it takes from people the fruits of their labor and destroys the value of their past labor that they have stored in their savings. But why don't more of us know this?
It's not for lack of a warning. Just this past year, Ron Paul dared to speak truth to power and inform the people of the means and consequences of inflation. In recent decades men like Murray Rothbard, Henry Hazlitt, and Hans Sennholz did the same. Men from past centuries have warned us too: men from the Old World, men steeped in theology and ethics who studied how man interacted with man in the market. One of these men was Father Juan de Mariana, S.J., and through a recent English translation of one of his works he now speaks to the New World too.
Father Juan de Mariana was a Jesuit priest, born in 1536 near Toledo, Spain, who, after spending time in Rome, Sicily, and Paris, returned to Toledo where he remained until his death in 1624. He was a prolific writer and boldly stated his opinions with a holy confidence wrought by prayer. Notable works include History of Spain (Historiae de rebus Hispaniae, 1592), which was recommended reading to James Madison by Thomas Jefferson and On Monarchy (De Rege et Regis Institutione, 1599) which was written at the request of King Phillip II. This latter work visited controversy to Mariana as some in France levied accusations that its message was the motivation for the assassination of King Henry IV in 1610.
Our focus today, however, will be his treatise On the Alteration of Money (De monetae mutatione). Mariana wrote this pamphlet, published in 1605, with the hope that the king and his court would be dissuaded from further debasing the realm's money. At the time, the king's treasury was depleted, due to "long and drawn-out wars in many places and by many other problems…" To replenish the treasury, the value of existing money had been doubled and new coins of copper of less weight and without the traditional small amount of silver had been issued. The debasing of silver was being considered also. Mariana could not help but speak out and saw himself as one "who defends the truth … and points out the public threat of dangers and evils" the kingdom faced. In his mind, this was "the most serious of issues to arise in Spain in many years."
After laying out his intentions and the facts of the situation, Mariana raises the question, "Does the king own his subjects' goods?" He answers, in short, no. Based on Aristotle and the Novellas Constitutiones, his reasoning is thus: All power has limits; when power exceeds its limits it becomes weak and breaks down. In the case of royal power, it becomes tyrannical. "[T]he very nature of royal power — if it is legitimate and just, it arises from the State — makes clear that the king is not the owner of his subjects' private possessions" and he has no power to take them. To do so is "criminal."
He then proceeds to ask if the king can "demand tribute from his subjects without their consent." Again he answers no, explaining, "The private goods of citizens are not at the disposal of the king. Thus, he must not take all or part of them without the approval of those who have the right to them."
And representative government is not always a sufficient means to grant approval. When rebuking the parliament of Castile he could just as easily be speaking to the US Congress:
There is certainly little benefit in summoning procurators of the states to parliaments in Castile. Most of them are poorly equipped to manage affairs. They are men who are led by chance — insignificant men of venal disposition who keep nothing in view but their desire to gain the prince's favor and to benefit from public disaster.
Once he has established that the king can not legitimately take his subjects' private possessions, he asks whether "a prince in every case [can] solve his fiscal problems on his own authority and debase his kingdom's money by diminishing its weight or its quality?"
Immediately, Mariana concedes two points: (1) the king may change the form of money in terms of how it's struck and engraved as long as the value of it remains unchanged; (2) the king may debase money without the people's consent in a period of war or siege as long as two conditions are met: (a) the debasement is temporary, only lasting as long as the war or siege; (b) as soon as the war or siege ends the king must make amends to the people by repaying all losses suffered by the debasement. Debasement in any other circumstance is wrong.
A "seizure" of possessions and an "injury" to the people have occurred because "what is declared to be more is worth less." A stern warning is given for anyone considering debasement in any other circumstances:
These strategies aim at the same thing: cleaning out the pockets of the people and piling up money in the provincial treasury. Do not be taken in by the smoke and mirrors by which metal is given a greater value than it has by nature and in common opinion. Of course, this does not happen without common injury. When blood is let by whatever device or strategy, the body will certainly be debilitated and wasted. In the same way, a prince cannot profit without the suffering and groans of his subjects.
Mariana goes on to explain that money has an intrinsic value and an extrinsic value. Briefly, the intrinsic value is that of the metal and weight of the coin in addition to its production costs. The extrinsic value is the nominal legal value established by law for a particular metal content and weight. It is incumbent upon the king to ensure that these two values always remain the same. To do otherwise invites trouble, for if the legal value of money is allowed to exceed the intrinsic value, it will prove difficult to stop, as the temptation for profits will overcome the treasury. It will also create havoc in the business community, since prices will adjust for the valuation of the money. It is here that Mariana first observes the phenomenon of inflationary price increases stating,
If the legal value of debased money does not decrease, surely all merchandise will sell at a higher price, in proportion to the debasement of the quality or weight of the money. The process is inevitable. As a result, the price of goods adjusts and money is less valuable than it previously and properly was.
Mariana continues with an explanation of how money, weights, and measures are the foundation of commerce, building his case from the ancients, Jews, Scripture, and Thomas Aquinas. It is so obvious that money "cannot be changed without danger and harm to commerce" that he almost taunts officials when he writes, "Those who are in power seem less educated than the people because they pay no attention to the disturbances and evils frequently caused by their decisions, both in our nation and beyond."
In a display of his fidelity to truth, he pauses to discuss the advantages of debasing the copper money, stressing the importance of their consideration. Following this examination is a short but technical history of Roman and Spanish alterations to money up to the current king's reign. Later in the treatise, he also discusses the prospect of debasing the silver and gold coinage reiterating the points he made in the copper discussion.
In his discussion of the disadvantages of debasement, Mariana again shows that truth in these matters is his goal, preferring to work with data rather than speculation, as that is "the safest approach, and the assured way to the truth." He continues by naming and discussing eleven disadvantages to altering the copper money. However, the first five are of much less importance than the latter six that one "could put up with them to avoid the greater disadvantages…"
These less important disadvantages are
- critics' claims that debasement has never been used;
- commerce will be hindered, especially international trade;
- the objection that the king has no authority to borrow from outsiders;
- wealth for pious works would not accumulate; and
- the expense of copper will be overbearing.
Space does not permit further explanation but again in Mariana's opinion their importance is minimal when compared to the six he called the "Major Disadvantages." These six are
- the large supply of copper money was against the law;
- it was "against right reason and the natural law herself — it is a sin to change them";
- price inflation will result;
- trade difficulties, even the destruction of trade may result once prices rise;
- the inevitability of the king's poverty; and
- "the greatest of them all: The general hatred that will be stirred up for the prince."
Not one to find faults without offering solutions, Mariana ends his treatise with a list of suggestions for the king that would help him attain his goals without exacting the scourge of inflation on his subjects. They sound hauntingly similar to the ideas put forth today that are so often ignored by those in power. First and foremost, reduce his budget by cutting his spending. Second, reduce the size of gifts given to those who serve him. Third, cut losses by reducing the scope of the empire and avoiding wars. Fourth, hold those in the king's court accountable so that there is no profiteering from their positions. And finally, add a tariff on imported luxury items. Mariana was convinced that implementing just one of these suggestions would yield all the income the king hoped to realize from the copper debasement and would do so without alienating the people.
Mariana leaves no doubt of what he thinks about money debasement or inflation. In various parts of his treatise he calls it "criminal," "evil," "fraud," "sin," and "unjust."
He's no less blunt in his description of those who resort to debasement to solve their problems. Though his treatise was written over four hundred years ago, we can still hear his voice exhort, "A prudent reader should notice whether or not we are getting on the same road; whether or not that historical moment is a portrait of the tragedy certainly threatening us."
Let us join Father Mariana in prayer, "beg[ging] God to shed His light upon the eyes and minds of those who are responsible for these things, so that they may peacefully agree to embrace and put it into action wholesome advice, once it is known."
Grabill, Stephen J. editor. Sourcebook in Late-Scholastic Monetary Theory. Lanham, MD: Lexington Books, 2007.