Supply-Side University, Spring Semester 1999: Lesson #6

Memo To: Students of Supply-Side University
From: Jude Wanniski
Re: Economic Policy in Ancient Rome, Part I

In this lesson and in next week’s, we have a guest lecturer, Bruce Bartlett, who was one of the earliest warriors in the Reagan supply-side revolution. He was Jack Kemp’s staff economist in the 1970s, had a stint as minority staff director of the Joint Economic Committee of Congress, then briefly as director of marketing at Polyconomics, then a deputy assistant secretary of Treasury for tax policy in the Bush administration. Currently, he is a senior fellow at the National Center for Policy Analysis. A prolific author, with several books to his credit, he is also a nationally-syndicated columnist with Creators Syndicate whose work appears regularly in The Washington Times. As we approach the new millennium, it occurred to me that Bruce had written the best short single piece I’d ever seen on the economic causes of the Roman Empire’s rise and then decline and fall. First published in the Cato Journal (vol. 14, no. 2, Fall 1994, pp. 287-303.), he graciously has assented to having it appear here in two bite-size morsels. If they whet your appetite for ancient Rome, you can go on to read the third volume of Will Durant’s History of Civilization, number three titled Caesar and Christ. It always intrigued me that Christianity took root in the earliest days of the Golden Age of Rome, which began with the supply-side tax and monetary policies of Caesar Augustus.

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Summary

A major factor in the rise of ancient Rome was its adherence to free market policies. These policies gave Rome the strongest economy of the ancient world, providing the Roman state with the resources to become the greatest empire of all time. Its decline can be traced directly to the reversal of these policies. High taxes, pervasive regulation and debasement of the currency ultimately undermined the strength of the Roman economy. In the end, the state simply did not have the resources to defend itself against barbarian invasions.

Introduction

From earliest times, Roman economic policy contrasted sharply with that in the Hellenistic world, especially Egypt. Economic policy in Greece and Egypt had gradually become highly regimented, depriving individuals of the freedom to pursue personal profit in production or trade, crushing them under a heavy burden of oppressive taxation, and regimenting workers into vast collectives where they were little better than bees in a great hive. The later Hellenistic period was also one of almost constant warfare, which, together with rampant piracy, closed the seas to trade. The result, predictably, was stagnation.

Stagnation bred weakness in the states of the Mediterranean, which partially explains the ease with which Rome was able to steadily expand its reach beginning in the 3rd century B.C. By the first century B.C., Rome was the undisputed master of the Mediterranean. However, peace did not follow Rome's victory, for civil wars sapped its strength.

Free Market Policies

Following the murder of Caesar in 44 B.C., his adopted son Octavian (later called Augustus) finally brought an end to internal strife with his defeat of Mark Antony in the battle of Actium in 31 B.C. It is important to understand that Octavian's victory was due in no small part to his championing of Roman economic freedom against the Oriental despotism of Egypt represented by Antony, who had fled to Egypt and married Cleopatra in 36 B.C. Thus Octavian's victory was a victory for Roman economic policy as well as a personal and political victory. As Oertel put it, "The victory of Augustus and of the West meant...a repulse of the tendencies towards State capitalism and State socialism which might have come to fruition...had Antony and Cleopatra been victorious."

The long years of war, however, had taken a heavy toll on the Roman economy. Heavy taxes and requisitions of supplies by the army, as well as rampant inflation and the closing of trade routes, severely depressed economic growth. Above all, businessmen and traders craved peace and stability in order to rebuild their wealth. Increasingly, they came to believe that peace and stability could only be maintained if political power were centralized in one man. This man was Octavian, who took the name Augustus and became the first emperor of Rome in 27 B.C., serving until 14 A.D.

Although the establishment of the Roman Principate represented a diminution of political freedom, it led to an expansion of economic freedom. Augustus clearly favored private enterprise, private property and free trade. The burden of taxation was significantly lifted by the abolition of tax farming and the regularization of taxation. Peace brought a revival of trade and commerce, further encouraged by Roman investments in good roads and harbors. Except for modest customs duties (estimated at 5%), free trade ruled throughout the Empire. It was, in Rostovtzeff's words, a period of "almost complete freedom for trade and of splendid opportunities for private initiative."

Tiberius, Rome's second emperor (14-37 A.D.), extended the policies of Augustus well into the first century A.D. It was his strong desire to encourage growth and the establishment of a solid middle class (bourgeoisie), which Tiberius saw as the backbone of the Empire. Oertel describes the situation:

The first century of our era witnessed a definitely high level of economic prosperity, made possible by exceptionally favorable conditions. Within the framework of the Empire, embracing vast territories in which peace was established and communications were secure, it was possible for a bourgeoisie to come into being whose chief interests were economic, which maintained a form of economy resting on the old city culture and characterized by individualism and private enterprise, and which reaped all the benefits inherent in such a system. The State deliberately encouraged this activity of the bourgeoisie, both directly through government protection and its liberal economic policy, which guaranteed freedom of action and an organic growth on the lines of laissez faire, laissez aller, and directly through measures encouraging economic activity.

Of course, economic freedom was not universal. Egypt, which was the personal property of the Roman emperor, largely retained its socialist economic system. However, even here some liberalization did occur. Banking was deregulated, leading to the creation of many private banks. Some land was privatized and the state monopolies were weakened, thus giving encouragement to private enterprise even though the economy remained largely nationalized.

The Dole

The reason why Egypt retained its special economic system and was not allowed to share in the general economic freedom of the Roman Empire is because it was the main source of Rome's grain supply. Maintenance of this supply was critical to Rome's survival, especially due to the policy of distributing free grain (later bread) to all Rome's citizens which began in 58 B.C. By the time of Augustus, this dole was providing free food for some 200,000 Romans. The emperor paid the cost of this dole out of his own pocket, as well as the cost of games for entertainment, principally from his personal holdings in Egypt. The preservation of uninterrupted grain flows from Egypt to Rome was, therefore, a major task for all Roman emperors and an important base of their power. The free grain policy evolved gradually over a long period of time and went through periodic adjustment. The genesis of this practice dates from Gaius Gracchus, who in 123 B.C. established the policy that all citizens of Rome were entitled to buy a monthly ration of corn at a fixed price. The purpose was not so much to provide a subsidy as to smooth out the seasonal fluctuations in the price of corn by allowing people to pay the same price throughout the year.

Under the dictatorship of Sulla, the grain distributions were ended in approximately 90 B.C. By 73 B.C., however, the state was once again providing corn to the citizens of Rome at the same price. In 58 B.C., Clodius abolished the charge and began distributing the grain for free. The result was a sharp increase in the influx of rural poor into Rome, as well as the freeing of many slaves so that they too would qualify for the dole. By the time of Julius Caesar, some 320,000 people were receiving free grain, a number Caesar cut down to about 150,000, probably by being more careful about checking proof of citizenship rather than by restricting traditional eligibility.

Under Augustus, the number of people eligible for free grain increased again to 320,000. In 5 B.C., however, Augustus began restricting the distribution. Eventually the number of people receiving grain stabilized at about 200,000. Apparently, this was an absolute limit and corn distribution was henceforth limited to those with a ticket entitling them to grain. Although subsequent emperors would occasionally extend eligibility for grain to particular groups, such as Nero's inclusion of the praetorian guard in 65 A.D., the overall number of people receiving grain remained basically fixed.

The distribution of free grain in Rome remained in effect until the end of the Empire, although baked bread replaced corn in the 3rd century. Under Septimius Severus (193-211 A.D.) free oil was also distributed. Subsequent emperors added, on occasion, free pork and wine. Eventually, other cities of the Empire also began providing similar benefits, including Constantinople, Alexandria and Antioch.

Nevertheless, despite the free grain policy, the vast bulk of Rome's grain supply was distributed through the free market. There are two main reasons for this. First, the allotment of free grain was insufficient to live on. Second, grain was available only to adult male Roman citizens, thus excluding the large number of women, children, slaves, foreigners and other non-citizens living in Rome. Government officials were also excluded from the dole for the most part. Consequently, there remained a large private market for grain which was supplied by independent traders.

Taxation in the Republic and Early Empire

The expansion of the dole is an important reason for the rise of Roman taxes. In the earliest days of the Republic, Rome's taxes were quite modest, consisting mainly of a wealth tax on all forms of property, including land, houses, slaves, animals, money and personal effects. The basic rate was just 0.01 percent, although occasionally rising to 0.03 percent. It was assessed principally to pay the army during war. In fact, afterwards the tax was often rebated. It was levied directly on individuals, who were counted at periodic censuses.

As Rome expanded, so did Roman taxes. In the provinces, however, the main form of tax was a tithe levied on communities, rather than directly on individuals. This was partly because censuses were seldom conducted, thus making direct taxation impossible, and also because it was easier to administer. Local communities would decide for themselves how to divide up the tax burden among their citizens.

Tax farmers were often utilized to collect provincial taxes. They would pay in advance for the right to collect taxes in particular areas. Every few years these rights were put out to bid, thus capturing for the Roman treasury any increase in taxable capacity. In effect, tax farmers were loaning money to the state in advance of tax collections. They also had the responsibility of converting provincial taxes, which were often collected in-kind, into hard cash. Thus the collections by tax farmers had to provide sufficient revenues to repay their advance to the state plus enough to cover the opportunity cost of the funds (i.e., interest), the transactions cost of converting collections into cash, and a profit as well. In fact, tax farming was quite profitable and was a major investment vehicle for wealthy citizens of Rome.

Augustus ended tax farming, however, due to complaints from the provinces. Interestingly, their protests not only had to do with excessive assessments by the tax farmers, as one would expect, but also because they were becoming deeply indebted to them. Since communities often lacked the cash or other liquid assets with which to pay their tax bill, tax farmers would advance them the necessary funds, charging high interest rates in return. A.H.M. Jones explains the problems with tax farmers:

Oppression and extortion began very early in the provinces and reached fantastic proportions in the later republic. Most governors were primarily interested in acquiring military glory and in making money during their year in office, and the companies which farmed the taxes expected to make ample profits. There was usually collusion between the governor and the tax contractors and the senate was too far away to exercise any effective control over either. The other great abuse of the provinces was extensive moneylending at exorbitant rates of interest to the provincial communities, which could not raise enough ready cash to satisfy both the exorbitant demands of the tax contractors and the blackmail levied by the governors.

As a result of such abuses, tax farming was replaced by direct taxation throughout the Empire. The provinces now paid a wealth tax of about one percent and a flat poll or head tax on each adult. This obviously required regular censuses in order to count the taxable population and assess taxable property. It also led to a major shift in the basis of taxation. Under the tax farmers, taxation was largely based on current income. Consequently, the yield varied according to economic and climactic conditions. Since tax farmers had only a limited time to collect the revenue to which they were entitled, they obviously had to concentrate on collecting such revenue where it was most easily available. Because assets such as land were difficult to convert into cash, this meant that income necessarily was the basic base of taxation. And since tax farmers were essentially bidding against a community's income potential, this meant that a large portion of any increase in income accrued to the tax farmers.

By contrast, the Augustinian system was far less progressive. The shift to flat assessments based on wealth and population both regularized the yield of the tax system and greatly reduced its "progressivity." This is because any growth in taxable capacity led to higher taxes under the tax farming system, while under the Augustinian system communities were only liable for a fixed payment. Thus any increase in income accrued entirely to the people and did not have to be shared with Rome. Individuals knew in advance the exact amount of their tax bill and that any income over and above that amount was entirely theirs. This was obviously a great incentive to produce, since the marginal tax rate above the tax assessment was zero. In economic terms, one can say that there was virtually no excess burden. On the one hand taxpayers had to earn enough to pay the tax, but on the other they paid no additional tax on earnings above this amount. Of course, to the extent that higher incomes increased wealth, some of this gain would be captured through reassessments. But in the short run, the tax system was very pro-growth.

The Rise and Fall of Growth

Rome's pro-growth policies, including the creation of a large common market encompassing the entire Mediterranean, a stable currency and moderate taxes, were very positive for trade. Hopkins finds empirical support for this proposition by noting the sharp increase in the number of known shipwrecks dating from the late Republic and early Empire as compared to earlier periods. The increase in trade led to an increase in shipping, thus increasing the likelihood that any surviving wrecks would date from this period. Rostovtzeff indicates that "commerce, and especially foreign and inter-provincial maritime commerce, provided the main sources of wealth in the Roman Empire."

Hopkins also notes that there was a sharp increase in the Roman money supply which accompanied the expansion of trade. He further notes that this expansion of the money supply did not lead to higher prices. Interest rates also fell to the lowest levels in Roman history in the early part of Augustus's reign. This strongly suggests that the supply of goods and services grew roughly in line with the increase in the money supply. There was probably also an increase in the demand for cash balances to pay taxes and rents, which would further explain why the increased money supply was non-inflationary.

During the early Empire revenues were so abundant that the state was able to undertake a massive public works program. Augustus repaired all the roads of Italy and Rome, restored the temples and built many new ones, and built many aqueducts, baths and other public buildings. Tiberius, however, cut back on the building program and hoarded large sums of cash. This led to a financial crisis in 33 A.D. in which there was a severe shortage of money. This shortage may have been triggered by a usury law which had not been applied for some years but was again enforced by the courts at this time. The shortage of money and the curtailment of state expenditures led to a sharp downturn in economic activity which was only relieved when the state made large loans at zero interest in order to provide liquidity.

Under Claudius (41-54 A.D.) the Roman Empire added its last major territory with the conquest of Britain. Not long thereafter, under Trajan (98-117 A.D.), the Empire achieved its greatest geographic expansion. Consequently, the state would no longer receive additional revenue from provincial tribute and any increase in revenues would now have to come from within the Empire itself. Although Rostovtzeff credits the Julio-Claudian emperors with maintaining the Augustinian policy of laissez-faire, the demand for revenue was already beginning to undermine the strength of the Roman economy. An example of this from the time of Caligula (37-41 A.D.) is recorded by Philo:

A little time ago in our own district by a person who was appointed to serve as collector of taxes. When certain debtors from poverty took flight in fear of some terrible retribution, he led off by force their women, children, parents, and other kin, and beat and abused them and inflicted every kind of outrage on them to reveal where the fugitive had gone or to pay what he owed--though they could do neither, the one from ignorance, the other from greater poverty than the fugitive's. He did not give up until he had wrung their bodies with the rack and scourge and ended their lives with unheard of afflictions....When there were no kin left, the outrage was extended to their neighbors and at times whole villages and towns, which were quickly abandoned and emptied of inhabitants.

Inflation and Taxation

As early as the rule of Nero (54-68 A.D.) there is evidence that the demand for revenue led to debasement of the coinage. Revenue was needed to pay the increasing costs of defense and a growing bureaucracy. However, rather than raise taxes, Nero and subsequent emperors preferred to debase the currency by reducing the precious metal content of coins. This was, of course, a form of taxation; in this case, a tax on cash balances.

Throughout most of the Empire, the basic units of Roman coinage were the gold aureus, the silver denarius, and the copper or bronze sesterce. The aureus was minted at 40-42 to the pound, the denarius at 84 to the pound, and a sesterce was equivalent to one-quarter of a denarius. Twenty-five denarii equaled one aureus and the denarius was considered the basic coin and unit of account. The aureus did not circulate widely. Consequently, debasement was mainly limited to the denarius. Nero reduced the silver content of the denarius to 90 percent and slightly reduced the size of the aureus in order to maintain the 25 to 1 ratio. Trajan (98-117 A.D.) reduced the silver content to 85 percent, but was able to maintain the ratio because of a large influx of gold. In fact, some historians suggest that he deliberately devalued the denarius precisely in order to maintain the historic ratio. Debasement continued under the reign of Marcus Aurelius (161-180 A.D.), who reduced the silver content of the denarius to 75 percent, further reduced by Septimius Severus to 50 percent. By the middle of the third century A.D., the denarius had a silver content of just 5 percent.

Interestingly, the continual debasements did not improve the Empire's fiscal position. This is because of Gresham's Law ("bad money drives out good"). People would hoard older, high silver content coins and pay their taxes in those with the least silver. Thus the government's "real" revenues may have actually fallen. As Bernardi explains:

At the beginning the debasement proved undoubtedly profitable for the state. Nevertheless, in the course of years, this expedient was abused and the century of inflation which had been thus brought about was greatly to the disadvantage of the State's finances. Prices were rising too rapidly and it became impossible to count on an immediate proportional increase in the fiscal revenue, because of the rigidity of the apparatus of tax collection.

At first, the government could raise additional revenue from the sale of state property. Later, more unscrupulous emperors like Domitian (81-96 A.D.) would use trumped-up charges to confiscate the assets of the wealthy. They would also invent excuses to demand tribute from the provinces and the wealthy. Such tribute, called the aurum corinarium, was nominally voluntary and paid in gold to commemorate special occasions, such as the accession of a new emperor or a great military victory. Caracalla (198-217 A.D.) often reported such dubious "victories" as a way of raising revenue. Rostovtzeff calls these levies "pure robbery."