Red-Blooded Risk: The Secret History of Wall Street

Government and Paper

The next chapter in our story concerns the Romans, the first civilization in which the government noticed the power of money. The emperors figured out that it was more efficient to tax people and then pay them to do what you wanted than to order things done. This worked fine at first. The Romans paid soldiers to loot places just outside the Empire. The money found its way back to Rome in taxes. Rome spent the money for goods from all over the Empire.

Unfortunately, like all governments since, the emperors didn't understand that money, like electricity, does work only when it circulates. Rome produced nothing. As the Empire grew, there was less and less to loot, and more and more border to protect from impoverished and angry barbarians. Things went from cash-flow positive to cash-flow negative. Rome continued to tax and spend, but without the external contribution there was no more circulation. If you tax someone, buy her goods with the money, then tax the money back to buy more of her goods, the whole thing stops working. You no longer have money. It is not a store of value—the government taxes it away. It is not a medium of exchange; no one wants it because the government taxes it away. It could still be a numeraire, except in response to the first two problems, also like all governments since, the Romans debased the currency and imposed wage and price controls.

The fall of the western Roman empire in 476 a.d. solved the problem. Two surviving institutions ...