We can always learn from History so it is a shame that we never seem to do so. Here is one example from the Roman era that resonates so much with what we are seeing today. Note the dilemma of deflation V inflation that they faced.

Roman Emperor Diocletian in A.D. 284.

Shortly after his assumption of the throne prices of commodities and the wages of labourers reached unprecedented heights.

Most agree that the major single cause of the inflation was the drastic increase in the money supply owing to the devaluation or debasement of the coinage. In the late republic and early empire, the standard Roman coin was the silver denarius; the value of that coin had gradually been reduced until, in the years before Diocletian, emperors were issuing tin-plated copper coins that were still called by the name “denarius. Silver and gold coins were naturally hoarded and were no longer found in circulation.

During the fifty-year interval ending with the rule of Claudius Victorinus in A.D. 268, the silver content of the Roman coin fell to one five-thousandth of its original level. With the monetary system in total disarray, the trade that had been hallmark of the empire was reduced to barter, and economic activity was stymied.

The middle class was almost obliterated and the proletariat was quickly sinking to the level of serfdom. Intellectually the world had fallen into an apathy from which nothing would rouse it.

To this intellectual and moral morass came the Emperor Diocletian and he set about the task of reorganization with great vigor. Unfortunately, his zeal exceeded his understanding of the economic forces at work in the empire.

In an attempt to overcome the paralysis associated with centralized bureaucracy, he decentralized the administration of the empire and created three new centers of power under three “associate emperors.” Since money was completely worthless, he devised a system of taxes based on payments in kind. This system had the effect of totally destroying the freedom of the lower classes — they became serfs and were bound to the soil to ensure that the taxes would be forthcoming.

The “reforms” that are of most interest, however, are those relating to the currency and prices and wages. The currency reform came first and was followed, after it had become clear that this reform was a failure, by the edict on prices and wages. Diocletian had attempted to instil public confidence in the currency by putting a stop to the production of debased gold and silver coins.

He issued a new denarius which was made of copper and the new coinage gave some stability to prices for a time, but unfortunately, the price level was still too high, in Diocletian’s judgment, and he soon realized that he was faced with a new dilemma.

The principal reason for the official overvaluation of the currency, of course, was to provide the wherewithal to support the large army and massive bureaucracy — the equivalent of modern government. Diocletian’s choices were to continue to mint the increasingly worthless denarius or to cut “government expenditures” and thereby reduce the requirement for minting them. In modern terminology, he could either continue to “inflate” or he could begin the process of “deflating” the economy.

Diocletian decided that deflation, reducing the costs of civil and military government, was impossible. On the other hand, to inflate would be equally disastrous in the long run. It was inflation that had brought the Empire to the verge of complete collapse.

It was in this seemingly desperate circumstance that Diocletian determined to continue to inflate, but to do so in a way that would, he thought, prevent the inflation from occurring. He sought to do this by simultaneously fixing the prices of goods and services and suspending the freedom of people to decide what the official currency was worth. The famous edict of A.D. 301 was designed to accomplish this end. Its framers were very much aware of the fact that unless they could enforce a universal value for the denarius in terms of goods and services — a value that was wholly out of keeping with its actual value — the system that they had devised would collapse. Thus, the edict was all pervasive in its coverage and the penalties prescribed, severe.

The edict was duly proclaimed in A.D. 301 and Diocletian clearly was on the defensive in announcing such a sweeping law, which affected every person in the empire every day of the week; he uses considerable rhetoric to justify his actions, rhetoric that was used before him and which, with variations, has been used in most times and places since.

In his effort to bring prices down to what he considered a normal level, Diocletian did not content himself with half measures, but he boldly fixed the maximum prices at which beef, grain, eggs, clothing and other articles could be sold [and also the wages that all sorts of workers could receive] and prescribed the penalty of death for anyone who disposed of his wares at a higher figure. 

The results were not surprising and from the wording of the edict, as we have seen, not unexpected by the emperor himself. According to a contemporary account,

then he set himself to regulate the prices of all vendible things. There was much blood shed upon very slight and trifling accounts; and the people brought provisions no more to markets, since they could not get a reasonable price for them and this increased the dearth so much, that at last after many had died by it, the law itself was set aside.

It is not certain how much of the bloodshed alluded to in this passage was caused directly by the government through the promised executions and how much was caused indirectly. A historian of this period, Roland Kent, believes that much of the harm was indirect. He concludes,

In other words, the price limits set in the Edict were not observed by the traders, in spite of the death penalty provided in the statute for its violation; would-be purchasers, finding that the prices were above the legal limit, formed mobs and wrecked the offending traders’ establishments, incidentally killing the traders, though the goods were after all of but trifling value; hoarded their goods against the day when the restrictions should be removed, and the resulting scarcity of wares actually offered for sale caused an even greater increase in prices, so that what trading went on was at illegal prices, and therefore performed clandestinely.

It is not known exactly how long the edict remained in force; it is known, however, that Diocletian, citing the strain and cares of government, resulting in his poor health, abdicated four years after the statute on wages and prices was promulgated. It certainly became a dead letter after the abdication of its author. Less than four years after the currency reform associated with the edict, the price of gold in terms of the denarius had risen 250 percent.

Diocletian had failed to fool the people and had failed to suppress the ability of people to buy and sell as they saw fit. The failure of the edict and the currency “reform” led to a return to more conventional fiscal irresponsibility and by A.D. 305 the process of currency debasement had begun again. By the turn of the century, this process had produced a two-thousand-percent increase in the price of gold in terms of denarii:

Although Diocletian’s attempt to control the economy ended in complete failure and he was forced to abdicate, it was only sixty years later that his successor, Julian the Apostate, was back at the same old stand. Edward Gibbon, the brilliant historian of the period, ironically noted that

the emperor ventured on a very dangerous and doubtful step, of fixing by legal authority, the value of corn [grain]. He enacted that, in a time of scarcity, it should be sold at a price which had seldom been known in the most plentiful years; and that his own example might strengthen his laws [he sent into the market a large quantity of his own grain at the fixed price]. The consequences might have been foreseen and were soon felt. The imperial wheat was purchased by the rich merchants; the proprietors of land, or of corn [grain] withheld from that city the accustomed supply, and the small quantities that appeared in the market were secretly sold at an advanced and illegal price.

As a desperate measure, succeeding emperors tried to tie workers to the land or to their fathers’ occupations in order to prevent workers from changing jobs as a means of evading the low wages prescribed for certain professions. This, of course, was the ultimate consequence of the attempt to control wages by law.