Ancient Rome was home to legendary emperors such as Julius Caesar, Nero and Marcus Aurelius. The very words “Kaiser” and “Czar” are derived from the name Caesar and we named the month of July after him. Such was his greatness. At its height, the Roman Empire comprised the entire Mediterranean area and a quarter of the world population. Just in the city of Rome alone lived approximately a million people. The Colosseum was used to entertain the people with gladiator and animal fights and is today the most visited tourist attraction in the Italian capital. The political history of the Empire is widely taught, but less is known about Roman economics and finance. Today’s article is a short history lesson about money and finance in one of the greatest empires the world has ever known: Rome.
The Roman economy was essentially an agricultural, but fairly urban market economy in which money was used as a medium of exchange. There were indirect transactions. Goods and services such as wine, donkeys and wheat had prices determined by supply and demand. Of course there was some government intervention every now and then, for example when a famine occurred because of drought. But for the most part, the market economy was left on its own. Yet, Rome was not even remotely as wealthy as we are today, most people lived just above the level of subsistence. The political elite were primarily concerned with their political positions which is to say they were busy with warfare and power politics, not with economic growth.
The denarius: a coin containing about 97% pure silver.
Markets were, compared to today, inefficient due to slowness of information, but trade occurred throughout the empire and between regions. The Roman infrastructure is famous for its quality, the word “aqueduct” for example is still used. Grain was imported from areas around the Mediterranean, most notably Egypt.
The cornerstone of the Roman monetary system was the denarius: a coin containing about 97% pure silver. Copper and gold were also widely used, but silver was the main monetary unit for everyday transactions. As the amount of silver in the denarius was initially held reasonably constant, the Romans enjoyed a relatively stable monetary system. It was the monetary standard for more than 450 years. However, over the years the value of the currency declined which caused priced to go up. This happened usually after a power transition between emperors when the new emperor ordered all coins to be handed over to the government and be restamped with his own image. In this process, cheaper copper was added and the relative amount of silver in the coin declined. We see, inflation is nothing new. Whereas today’s central and commercial banks create money digitally, the Roman emperors just melted copper with silver to spend more than could be raised in taxes.
For the lack of general development, capital markets in Rome cannot to the slightest extent be compared to modern markets. However, there was a market for capital in which money was lent and borrowed.
The elite used their money to benefit from their positions.
Loans were at times issued carrying interest payments often between 4 and 12 percent. The money came from the aristocracy, such as Senators who financed the Empire to benefit from their positions. This capital was not only used to finance military campaigns to foster imperial expansion, but also to fund production and trade. To institutionalize these practices something like a banking system emerged to connect supply of funds with demand. Again, incomparable to modern financial institutions, but nevertheless institutions that borrow and lend, pumping capital flows around to facilitate the economy.
The ancient Roman Empire was wealthy compared to its contemporaries. It had a sound monetary system in place based on silver, which deteriorated over time through inflation. Free market institutions were in place and largely left to their own devices. Capital flew from savers to investors (both the aristocracy) to finance production and military expansion, but remember that this was an elite game. Ordinary citizens in the outskirts of the Empire were not rich but happy to not die of starvation. Still, the level of development the Romans achieved is admirable. The market had made a great empire.