If you were as unfortunate as I was, and attended American public schools in the last thirty years, you were told more lies than you were facts about ancient Greece. The lies told today mostly involve the open practice of homosexuality, even though there are almost no references to it in classical literature. The lies told to me, going to elementary school in the early 1980’s, were concerning Greek democracy and its influence on American government. I was taught that Athens was a jewel of individual liberty, while Sparta was a military dictatorship that knew nothing but violence. Nothing could be further from the truth.
Machiavelli points out that the democracy of Athens (just like democracies in general) quickly turned to outright anarchy and mob rule, ending in a tyranny within less than one hundred years. Sparta, on the other hand, enjoyed a unique, albeit bizarre, form of republic so strong that it lasted more than eight hundred years under the same, original set of laws. This makes Sparta the single longest lasting state the world has ever known (that is, under the same constitution). It’s unique laws and culture were the invention of one man, Lycurgus. Though of royal blood himself, left his throne in the hands of another king as he traveled the world, borrowing the best traits from the governments of every land he visited, writing his laws upon returning. This tale, I will end here in the interests of saving space, since debate about the exact method of governing Sparta is an entirely separate, though fascinating argument in itself. I would advise those answering this post to consult Plutarch’s biography of Lycurgus before continuing, if you have not already. But please do not rely on modern scholars interpretation of Spartan life, especially since they never touch on the subject of Spartan economics. I also realize that Lycurgus’ idea of “freedom” is not the kind we think of today, since it meant mainly freedom from foreign intervention.
As a result of Sparta’s long war with Messenia, Sparta was almost surely bankrupt. They had, out of necessity, become an isolationist, national security state, ruling over Messenian Helot slaves that outnumbered Sparta’s nobles at least ten to one. As a measure to facilitate trade within his own borders, Lycurgus did something that had never been done before. He declared that all Spartan currency should be made of iron, effectively inventing fiat money, as well as legal tender laws. This further isolated Sparta, as was also his intent, since such coin was totally worthless outside Spartan teritory.
Fiat currency, though extremely dangerous, has had its success stories, and Sparta is surely one of them. For the eight hundred years of Sparta’s government, there was no reference to any kind of inflation. Had it occurred, it would surely have been noteworthy, since carrying a cartload of iron coins to buy a pair of shoes could not have escaped the attention of ancient scholars. This monetary system seems to have collapsed only when Sparta expanded its borders beyond Laconia, since foreigners would never have accepted fiat money. It is strangely joyful to think that the basic laws of economics helped lay waste to such an otherwise powerful state.
Another notable success of fiat money was Benjamin Franklin’s “Continental Scrip”. Having a severe shortage of gold and silver coin, the British colonies were forced to issue fiat money to make trade easier within America. This worked splendidly, even though it was no good for thepayment of taxes. Once Franklin foolishly told Bank of England officials how America suddenly became rich, Britain quickly made Scrip illegal, calling it counterfeiting. The Bank of England printed money out of nothing too, of course. The only difference was that Continental Scrip carried no debt!
Fiat money failed, however, when Continental Currency was used during the American Revolution. The reason for this is quite simple. The government issues fiat money to buy goods for the war, and anything used in war is a complete drain on the economy. The goods produced for war never add to the wealth of the population. They are useless for anything but destruction, and require expensive maintenance and replacement when they either break or are blown up. To replace wartime goods, more money is printed and used to buy them, and since the amount of money in circulation rapidly grows compared to the amount of goods and services available, inflation is inevitable.
During the American Civil War, Abraham Lincoln solved his problem of how to pay for a war by temporarily subverting the gold standard and printing his own fiat money. This he decided to do instead of increasing the national debt, with lenders charging interest rates of up to 20%. His “green backs” were backed by nothing but the good faith and credit of the United States. Curiously, this did not cause inflationary problems, even though war production exploded. The price of gold stayed secure at twenty dollars per ounce before, during, and after the Civil War. As soon as the war was over, the U.S. went right back on the gold standard, but Lincoln’s “green back” money was so popular that it was reissued until 1994!
Getting back to Sparta, I must point out this enigma I am unable to solve. Sparta, for nearly eight hundred years, used nothing but fiat money. They managed to live securely and without inflation, even though they were in a constant state of war. Though prolonged wars were rare, nearly all production related to war in one way or another, in order to maintain the Spartan machine. If anyone has insight into this phenomenon, please post an answer. In conjunction with getting rid of money with built-in debt, figuring this out may be the answer to controlling inflation forever.