Introduction to Finance

Ancient Rome 
During the Punic Wars, devaluation led to infl ation as the heavy bronze 
coin was reduced in stages from one pound to one ounce. Similar infl ation occurred in Roman 
history. Augustus brought so much precious metal from Egypt that prices rose and interest 
rates fell. From the time of Nero, debasements were frequent. The weight of gold coins was 
gradually reduced, and silver coins had baser metals added to them so that they were fi nally 
only 2 percent silver. Few attempts were made to arrest or reverse this process of debasement 
of coins as the populace adjusted to the process. When Aurelian tried to improve the coinage 
by adding to its precious metal content, he was resisted so strongly that armed rebellion 
broke out.
The Middle Ages Through Modern Times 
During the Middle Ages, princes and 
kings debased the coinage to get more revenue. The rulers of France used this ploy more than 
others, and records show that profi t from debasement was sometimes greater than the total of 
all other revenues.
An important example of infl ation followed the arrival of Europeans in America. Gold 
and silver poured into Spain from Mexico and Peru. Since the riches were used to buy goods 
from other countries, they were distributed over the continent and to England. Prices rose in 
Spain and in most of Europe but not in proportion to the increase in gold and silver stocks. 
This was because trade increased and because many people hoarded the precious metals.
Paper money was not used generally until the end of the seventeenth century. The fi rst 
outstanding example of infl ation due to the issuing of an excessive amount of paper money 
was in France. In 1719, the government gave Scottish banker John Law a charter for a bank 
that could issue paper money. The note circulation of his bank amounted to almost 2,700 million 
livres (the monetary unit in use at that time in France), against which he had coin of only 
infl ation 
an increase in the price of 
goods or services that is not off set 
by an increase in quality

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C H A PT E R 8 Interest Rates
21 million livres and bullion of 27 million livres. Prices went up rapidly, but they fell just as 
fast when Law’s bank failed. Afterward, the money supply was again restricted.
The next outstanding periods of infl ation were during the American Revolution (1775–83) 
and French Revolution (1789–99). For example, France’s revolutionary government issued 
paper currency in huge quantities. This currency, called assignats,
 
declined to 0.5 percent of 
its face value. Spectacular infl ation also took place in Germany in 1923, when prices soared 
to astronomical heights. During World War II, runaway infl ation took place in China and 
Hungary, as well as in other countries.
Inflation in the United States
Monetary factors have often aff ected price levels in the United States, especially during major 
wars.