The History of Money & Inflation

I’m Andy Temte and welcome to the Saturday Morning Muse! Start your weekend with musings that are designed to improve financial literacy around the world. Today is June 21, 2025.

Okay, last week we took a little detour from our history lessons on money and macroeconomics for a special Father’s Day message. It should be no surprise that my list of Top 10 Dad Skills concluded with skill #10 — Financial Literacy!

Today, let’s return to our discussion on the history of money. In our episode from June 7th, we introduced the concept of the velocity of money—that money flows through an economy and the rate at which money flows from one economic participant to another is a key measure of economic activity. Higher velocity or flow indicates higher levels of economic activity, all else the same. We also talked about how governments got involved early in the evolution of money to help increase trust and confidence in monetary systems.

So let’s continue the story with a prominent example of government-issued coinage. As you might expect, we’ll start with the Romans. We start with the Romans because that’s where the modern word for money originated.

While we’ll avoid plunging down the rabbit hole of Greek and Roman mythology, the Roman goddess Juno Moneta’s temple was located near the Capitolium—one of the seven hills of Rome. Roman coinage was minted near her temple, so the moneta became the name for both the place where coinage was made (the mint) and for the currency that was minted there. So both the modern words mint and money have their origins traced back to ancient Rome!

The Romans were prolific in their creation of coinage with each new emperor minting coins with their name and likeness pressed onto the front of each coin. If you reach into your pocket and pull out a random set of modern coins, you’ll see that the front, or obverse, of each coin has the likeness of a famous historical figure. Abraham Lincoln is on the penny, Thomas Jefferson’s face dons the nickel, FDR is on the dime, and George Washington is on the quarter. So there’s a direct connection between the design of the coinage you have in your pocket and how coins were designed by the Romans!

The Romans didn’t just use coinage for commerce. They also used coins as storytelling tools—a way to spread propaganda across a vast empire. In many cases, the only way a citizen would know that there was a regime change—a new emperor—would be by looking at the new coins they received in economic transactions.

Roman coins depicted emperors as god-like figures, and the coin’s reverse (the opposite side of the obverse) would typically contain an image that showed the emperor leading a great battle or engaged in some other accomplishment they wanted everyone to know about.

Continuing with our theme that money represents a debt to be paid, the Roman government minted coinage to pay its soldiers—or legionaries—for their service. Roman soldiers would then use those coins to support themselves and their families, creating economic activity as this currency flowed, or circulated, throughout the empire and beyond.

Debasement and Inflation

We can’t talk about early coinage without introducing the concept of debasement. Now, I can’t resist—there’s a really sweet dad joke lurking within this term. “Hey, why are my coins losing value? They’re in de-basement!”

All kidding aside, debasement occurs when the worth or value of a coin falls. Historically, debasement was the result of reducing the precious metals content of each coin in the minting process, making them less valuable to traders and consumers.

If a Roman emperor was more militaristic or expansionist, they had to fund these activities by minting more coins to pay more soldiers and buy more military equipment. Since mining more silver was difficult and costly, the emperor’s finance ministers would instead put less silver in each coin and use cheaper, more common metals like copper or nickel.

Traders and consumers would quickly realize that newly minted coins were less valuable—meaning that each coin would buy fewer goods. If one Denarius—the main silver coin of the Roman Republic—purchased five loaves of bread before debasement, but only purchased four loaves of bread after the silver content of a Denarius was reduced, then the purchasing power of each Denarius had declined by 20% [(4-5)/5]x100.

Since the quantity of goods and services in the Roman economy hadn’t changed but each coin was worth less, you needed more coins to buy the same amount of a good or service, all else the same. The result is that the price of each good had increased with no increase in the quantity of those goods. This is called inflation.

In our simple example above, a single loaf of bread cost 0.2 Denarius before debasement (1/5), and cost 0.25 Denarius after debasement (1/4). This is represents a 25 percent increase in the price of bread [(0.25-0.2)/0.2]x100.

Now I want to be careful with our terminology here. In our example of the Roman Denarius and loaves of bread, the price of bread increased by 25 percent. Please note that a single price increase of a single good in an economy is not inflation. Inflation is defined as a sustained increase in the general price level of goods and services in an economy over time.

So in our Roman debasement example, to say that the Roman economy had experienced inflation, we have to assume that debasement led to increased prices across the economy over time and not only to an increase in the price of bread.

The Modern Lesson

Inflation is a very nuanced concept and we’ve only scratched the surface with our discussion of currency debasement and its effects on prices.

The modern lesson today is that central banks are typically in charge of what’s called monetary policy. In our ancient Roman example, finance ministers made a monetary policy decision on behalf of the emperor to debase the Denarius to pay for a military action or territorial expansion. Today in the US, the Federal Reserve is our central bank and they make independent monetary policy decisions that can impact inflation and economic activity.

While debasement of coinage is no longer an issue because we no longer use precious metals in the creation of what we call money, modern currencies can still be debased through the actions of central banks through an increase in the money supply by lowering interest rates and through other measures that we’ll discuss in future episodes.

Until next week…

Grace. Dignity. Compassion.