The Roman Empire never had a balanced economy. In the beginning of the Republic, when Rome was just a small city-state, it was mainly a subsistence economy where even the Dictator Cinncinatus was a farmer. But as soon as the expansion started, the equilibrium became upset.


On the one hand the Romans had a sort of free market policy. In principle everybody could do what they wanted, and that gave their economy a great dynamic, compared to the more collectivist systems in eg Greece or Egypt. But on the other hand they had no idea of macroeconomic theory ... Money was still a relatively new concept at the time, and the trimetallic standard the Romans employed did not make things easier. Throughout most of the Empire, the basic units of Roman coinage were the gold aureus (which was usually not in circulation), the silver denarius, and the copper or bronze sesterce. Four sesterces were one denarius and twenty-five denarii equaled one aureus. The denarius was considered the basic coin and unit of account.

The problems inherent in such a system are perhaps best described in (3):
"When a government tried to base its money on both gold and silver, they immediately inherited a whole set of new problems. What happens when gold becomes more plentiful and silver more scarce? If the number of ounces of silver you can get for one ounce of gold stays the same, won’t people trade all their gold for silver? What happens to those people whose wealth is all in gold coins. Do they all of a sudden have less money? Do they have the same amount of money and is it less valuable? Can you buy less wheat with your gold, or can you buy more wheat with your silver? Will the price of wheat change at all under these circumstances?"

Anyway. While Rome was expanding, everything was fine and dandy. The veterans would be awarded with land, the generals would bring ridiculous amounts of bounty, and the captured slaves would do the work.

Slavery was actually a first social problem - and not only for the slaves - because nobody could economically compete with slave labor. Many farmers had a problem anyway when they could not cultivate their land because they were constantly fighting in some foreign country. This caused a migration into the city, while the land was bought up by aristocrats who created huge estates worked by slaves. In Rome already the Gracchi introduced a dole of cheap grain for the poor unemployed underclass. Emperor Augustus then provided free grain for 200 000 people in a city of about a million, and nobody would ever dare to risk the anger of the mob by abolishing that institution.

But the real trouble started once the conquests ground to a halt. Nor did the Romans see the point in them anymore, the empire was hard enough to govern anyway - Augustus for example specifically told his heir to-be Tiberius to refrain from any more expansive (and expensive) wars. On the one hand the pax romana was of course a boon, but on the other hand the supply of land, gold and cheap labor started to dry up. The economy decentralized, and Rome itself did not produce anything. The adverse trade balance meant that huge amounts of money were flowing out of the city, especially into the eastern Mediterranean. The immense costs for public works and support of the army however remained.

The first emperors Augustus and Tiberius were financially rather disciplined, and combined with the peace dividend Caligula inherited a well filled treasury. The contents of which he blew right away on his extravagant games and lifestyle. His successor Claudius was more responsible and restored the empire's finances - Nero in turn spent huge amounts on the rebuilding of Rome after the great fire and his pet projects. But aside from the emperors' personal characteristics, the unsound economy remained a problem. The tax base was precarious - the actual collection of the taxes was outsourced to tax farmers, and the owners of the large estates found ways to avoid having to pay their share by bribery or by lobbying.

The civil wars of course also did their part, causing devastation and curtailing trade. The later emperors therefore started a dangerous trend: Because they did not have enough bullion left, they debased the money. Already Nero reduced the silver content of the denarius to 90 percent, under Marcus Aurelius a denarius was only 75 percent silver, and in the third century AD a denarius was only brass with a silver coating. This of course caused a huge inflation and is a prime example for Gresham's Law. Finally Diocletian tried to stop it with his Maximum Prices Edict, but that just could not work out. Later emperors were also infamous for making up charges against wealthier subjects just to confiscate their property.

At this point, in the third century AD, the money economy completely broke down, and with it the system of taxation. This forced the state to directly appropriate whatever resources it needed wherever they could be found. Food and cattle, for example, were requisitioned directly from farmers. Diocletian also introduced some reforms here, creating a sort of planned economy, but in the long run, that only bought some more time. In the fifty years after Diocletian the tax burden roughly doubled, making it impossible for small farmers to live on their production. Peasants became slaves willingly to avoid having to pay taxes! This phenomenon was so widespread and so injurious to the state's revenues, that in 368 AD Emperor Valens declared it illegal to renounce one's liberty.

The empire had reached it's apex in the middle of the second century C.E. and then went into a slow but steady decline. In the end, there were no resources left to pay the army or the build and maintain forts or ships. The barbarian invasions, which were the final blow to the Roman state in the fifth century, were simply the culmination of three centuries of deterioration in the fiscal capacity of the state to defend itself. In fact, the Roman Empire had ceased to be Roman quite some time ago, when more and more "barbarians" were allowed to settle inside its borders. So its breakdown did not change much for the common people, except maybe that their taxes lowered. However, money almost disappeared from Europe until the Renaissance, along with the complex economy and trade it enabled. That was one of the main differences between the "advanced" Antique and the "backward" Middle Ages that followed.


Sources:
(1) - http://www.cato.org/pubs/journal/cjv14n2-7.html
(2) - http://www.roman-empire.net/articles/article-018.html
(3) - http://myron.sjsu.edu/romeweb/economy/ECONSYS.HTM
(4) - http://thoughts.editthispage.com/stories/storyReader$100



byzantine reminds me that the East Roman Empire survived until the 15th century, which is of course true, and he of all people should know best :)
It appears that Emperor Constantine managed to avoid the worst there by introducing a new currency, the solidus.

Cletus the Foetus says: It is perhaps not entirely true that no one could compete with slave labour. The Romans eventually emancipated the slaves, and it was hardly from the goodness of their hearts -- slaves are not as efficient as free labourers, because people work better to gain rewards than to avoid punishments. However, the full effects of this difference can only really be appreciated as the economy develops, because the difference, though ever present, increases dramatically; so it's not surprising that we find emancipation only later, when the economy is more developed (though the state was also more developed and there were bigger problems to deal with by then!)

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