Based on historical research, the “scary truth” economists often highlight is that inflation is frequently a policy failure—a difficult lesson learned from periods like the 1970s “Great Inflation” in the U.S. and even the Roman Empire, where short-term political motives repeatedly triumphed over long-term economic stability. These historical episodes reveal that the true danger often lies not in the inflation itself, but in the denial, misdiagnosis, and politically expedient responses of those in power .
The table below compares two profound historical inflation crises separated by centuries.
| Aspect | The Great Inflation (U.S., 1965-1982) | The Roman Empire (c. 1st – 3rd Centuries AD) |
|---|---|---|
| Primary Cause | Policy failure; Federal Reserve allowing excessive money supply growth to pursue low unemployment . | Fiscal irresponsibility; emperors debasing coinage to fund deficits, wars, and court spending . |
| Policy Motive | Exploit the Phillips Curve trade-off between inflation and unemployment . | Fund empire defense, avoid tax increases on elites, and maintain popularity through spending . |
| Mechanism | Abandonment of the gold standard (Bretton Woods), enabling unanchored money printing . | Systematic reduction of silver content and weight in denarius coinage . |
| Consequences | Stagflation (high inflation + high unemployment), loss of public confidence, severe recessions . | Social disorder, a return to barter, price controls, and the erosion of fixed incomes for soldiers/officials . |
| Ultimate Solution | Painful, deliberate policy shift under Fed Chair Paul Volcker, who raised interest rates drastically to break the cycle . | Failed attempts at wage and price controls (Edict of Diocletian); no lasting solution, contributing to imperial decline . |
The Roman Empire: Inflation Through Currency Debasement
The Roman Empire demonstrates that the core dynamics of inflation are ancient. The Roman government’s budget was primarily funded by a agricultural surplus, exacted as tax from a vast peasant population. The largest expense was defending its extensive borders, which required a standing army of 300,000 soldiers who were well-paid and received a substantial bonus upon retirement .
This created a persistent fiscal pressure. When emergencies like barbarian invasions, civil wars, or the self-indulgence of emperors like Nero and Commodus caused spending to exceed income, emperors repeatedly turned to a simple expedient: debasement of the currency . They used two main tactics:
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Reducing the weight of silver coins.
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Reducing the proportion of silver in each coin, adding cheaper base metals instead .
By combining these methods, the government could mint more coins from the same amount of silver, using the new, inferior coins to pay its bills. The effects were catastrophic over time. Under Emperor Augustus (27 BC – 14 AD), the denarius was about 98% silver. By AD 270, it contained only about 3% silver . This massive increase in the number of coins chasing a similar amount of goods led to dramatic price increases. For example, the price of a bushel of wheat skyrocketed from 1 denarius in AD 110 to 36,000 denarii by AD 338 .
The consequences were a vicious cycle that eroded the very fabric of the empire:
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Social Disorder: Soldiers and civil servants on fixed cash incomes were hit hardest as their purchasing power vanished. Soldiers often responded by seizing supplies from peasants by force, increasing lawlessness .
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Failed Price Controls: In AD 301, Emperor Diocletian tried to break the cycle with his “Edict on Maximum Prices,” which fixed prices and wages for over 1,000 goods and services. The policy failed almost immediately because it ignored market forces and the vast variations in local conditions across the empire .
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Erosion of Trust: The period was marked by a loss of confidence in the currency, with many people preferring to barter rather than use the deteriorating coinage, mirroring the “black economy” seen in modern times .
The Great Inflation: A Modern Failure of Monetary Policy
The “Great Inflation” in the United States from 1965 to 1982 stands as the paramount example of macroeconomic failure in the post-war period . Its origins were not in malice, but in a flawed intellectual framework and political pressures.
The motive was the pursuit of full employment, guided by the then-dominant Keynesian stabilization policy and a belief in a stable Phillips Curve—a supposed trade-off where lower unemployment could be “bought” with modestly higher inflation . This was an attractive proposition for policymakers, but it was based on a fatal flaw. Economists Milton Friedman and Edmund Phelps warned that this trade-off was only temporary; once people came to expect inflation, ever-higher rates would be needed to keep unemployment low, a prediction that proved tragically accurate .
The means for this policy came with the collapse of the Bretton Woods system in 1971. This global monetary system had linked the US dollar to gold, imposing a discipline on how much money could be printed. When President Nixon severed the dollar’s last link to gold, the US and most of the world’s currencies were placed on an unanchored paper money standard for the first time in history, giving central banks far more discretion to expand the money supply .
The opportunity for the Great Inflation to unfold was created by a “perfect storm” of events:
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Fiscal Imbalances: The combination of President Johnson’s “Great Society” programs and the Vietnam War led to large government deficits .
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Supply Shocks: The OPEC oil embargo of 1973 and a second energy crisis in 1979 sent energy costs soaring, creating “cost-push” inflation .
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Bad Data: Real-time economic data significantly overstated the economy’s potential, leading policymakers to believe they could stimulate more without triggering inflation than was actually possible .
The Federal Reserve, prioritizing its employment mandate, accommodated these fiscal imbalances and tried to lean against the headwinds from energy costs. The result was an acceleration of the money supply that raised prices without reducing unemployment. The Phillips Curve trade-off broke down, leading to the dreaded phenomenon of “stagflation”—high inflation and high unemployment simultaneously . Public confidence in the Fed evaporated.
The crisis was only conquered by Fed Chairman Paul Volcker, who initiated a painful but necessary policy known as the “Volcker Shock.” Starting in 1979, the Fed raised interest rates aggressively, with the federal funds rate peaking near 20% in 1981 . This policy deliberately slowed the economy to break the inflationary psychology, triggering two severe recessions but ultimately succeeding in restoring price stability and the Fed’s credibility .
The Uncomfortable Lessons for Today
The historical record offers several uncomfortable truths that remain highly relevant.
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Inflation is Fundamentally a Monetary Phenomenon: As Milton Friedman famously stated, “Inflation is always and everywhere a monetary phenomenon” . While supply shocks and other factors can push prices up temporarily, a sustained, widespread rise in prices requires a prior increase in the supply of money. Both Rome and the 1970s U.S. show that when governments finance their spending by creating money (whether by debasing coinage or through central bank action), inflation is the inevitable result.
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Denial and Political Expediency Are Major Risks: A key lesson from the 1970s is the danger of denial. As one analysis notes, Fed Chair Arthur Burns dismissed the inflation of his era as due to idiosyncratic factors like food shortages and the OPEC embargo, leading to a catastrophic policy blunder . Similarly, the Roman emperors chose the politically easy path of debasement over the difficult choices of raising taxes or cutting spending.
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Price Controls Are a Tempting but Dangerous Trap: History shows that direct government controls on prices, from Diocletian’s Edict to the WWII Office of Price Administration, fail to address the root cause of inflation and create significant unintended consequences, including shortages, black markets, and degraded quality (a phenomenon dubbed “skimpflation”) .
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Breaking Inflation Requires Painful Resolve, Not Popularity: Ending an entrenched inflation cycle is politically difficult because it requires policies that deliberately slow the economy. Volcker’s high-interest-rate medicine was deeply unpopular and caused widespread pain, but it was necessary to cure the disease. The Roman Empire, by contrast, never found the political will to implement a lasting solution, which contributed to its long-term decline.
The scary truth that these historical narratives reveal is that inflation is often a symptom of deeper institutional failures. The path to stability requires policymakers to resist short-term political pressures, maintain the independence and credibility of monetary institutions, and acknowledge that there are no painless solutions once inflation becomes embedded in the economy.
