Austrian Business Cycle Theory (ABCT) and the Natural Rate of Interest

The Austrian business cycle/trade cycle theory that Hayek proposed in the early 1930s took up Knut Wicksell’s hypothetical “natural rate of interest” and uses that concept in its analysis. In ABCT, the market rate of interest (a monetary rate) falls below the natural rate (the return on capital). As resources are drawn away from production in lower-order stages that produce consumer goods, there is inflation in consumer goods relative to capital goods, and then interest rates rise. This supposedly causes a crisis as many investments in higher-order stages of production cannot be profitably maintained, resulting in liquidation and higher unemployment.

What does the “natural rate of interest” mean? It can have different meanings:

“Earlier writers defined the natural rate of interest concept in various ways. Hayek originally defined the natural rate as the rate of interest that would prevail if savings and investment were made in natura; that is, without any distortionary monetary effects [i.e., without money]. Mises (1978, p. 124) defined the natural rate of interest as the equilibrium rate for the capital structure.^* Later treatments defined the natural rate as the real marginal productivity of capital or as the interest rate which equalizes ex ante savings and investment” (Cowen 1997: 95).
^* This can be found in Mises 2002 [1978]: 129–130.

In the early work of Hayek, he used a Wicksellian definition of the natural rate of interest, and we can cite Knut Wicksell’s explanation of the concept and how monetary equilibrium occurs:

“The rate of interest at which the demand for loan capital and the supply of savings exactly agree, and which more or less corresponds to the expected yields on the newly created real capital, will then be the normal or natural rate. It is essentially variable. If the prospects of employment of capital become more promising, demand will increase and will at first exceed supply; interest rates will then rise as the demand from entrepreneurs contracts until a new equilibrium is reached at a slightly higher rate of interest. At the same time equilibrium must ipso facto obtain—broadly speaking, and if it is not disturbed by other causes—in the market for goods and services, so that wages and prices remain unchanged” (Wicksell 1934: 193).

The natural rate or “the expected yields on the newly created real capital” is the analogue of the marginal efficiency of capital (Uhr 1994: 94).

The concept of the Wicksellian natural rate is defined by Frank Shostak:

“There is a certain rate of interest on loans which is neutral in respect to commodity prices, and tend neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods. It comes to much the same thing to describe it as the current value of the natural rate of interest on capital.”
Shostak, F. 2008. “The Myth of the Neutral Interest Rate Policy,” Mises.org, February 8
http://mises.org/daily/1743

Philippe Burger provides another explantion:

“Wicksell ... defines the natural interest rate as: ‘The rate of interest at which the demand for loan capital and the supply of savings exactly agree, and which more or less corresponds to the expected yield on the newly created capital, will then be the normal or natural real rate.’ ... The natural interest rate equals the marginal product of capital at full employment. A reduction in the market rate (through an increase in the money supply) below the natural rate may stimulate investment. However, as the economy is assumed to be at full employment (everyone willing to accept a wage equal to the marginal product of labour has employment), it also causes inflation for the period during which the natural rate exceeds the market rate” (Burger 2003: 63).

If the natural rate is conceived in real terms (or, in Latin, in natura), we have a barter economy where real commodities are loaned out and repaid in kind, and the supply of real commodities for loan equals the amount demanded. In a monetary economy, credit money via fractional reserve banking and the fiduciary media it creates create a media that provides real resources but without freeing up those resources in real terms. Now one problem with this analysis is that the natural interest rate concept depends on the assumption that an economy has no significant idle resources and it has full employment. In reality, economies frequently have unused capacity, idle resources and unemployment, and an economy open to trade will be able to import both factor inputs and capital goods, which can ease inflationary pressures.

But moving to historical criticisms of Hayek’s influential presentation of ABCT in Prices and Production (London, 1931), there was an important exchange between Sraffa and Hayek that can be read in Sraffa (1932a), Hayek (1932), and Sraffa (1932b). (For Kaldor’s attack on Hayek, see Kaldor 1939, 1940, 1942.)

One important criticism of Sraffa was as follows:

“Dr. Hayek’s theory of the relation of money to the rate of interest is mainly given by way of criticism and development of the theory of Wicksell. He states his own position as far as it agrees with Wicksell’s as follows: ‘In a money economy, the actual or money rate of interest may differ from the equilibrium or natural rate, because the demand for and the supply of capital do not meet in their natural form but in the form of money, the quantity of which available for capital purposes may be arbitrarily changed by the banks.’ An essential confusion, which appears clearly from this statement, is the belief that the divergence of rates is a characteristic of a money economy: and the confusion is implied in the very terminology adopted, which identifies the ‘actual’ with the ‘money’ rate, and the ‘equilibrium’ with the ‘natural’ rate. If money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might be at any one moment as many ‘natural’ rates of interest as there are commodities, though they would not be ‘equilibrium’ rates. The ‘arbitrary’ action of the banks is by no means a necessary condition for the divergence; if loans were made in wheat and farmers (or for that matter the weather) ‘arbitrarily changed’ the quantity of wheat produced, the actual rate of interest on loans in terms of wheat would diverge from the rate on other commodities and there would be no single equilibrium rate. In order to realise this we need not stretch our imagination and think of an organised loan market amongst savages bartering deer for beavers. Loans are currently made in the present world in terms of every commodity for which there is a forward market. When a cotton spinner borrows a sum of money for three months and uses the proceeds to purchase spot, a quantity of raw cotton which he simultaneously sells three months forward, he is actually ‘borrowing cotton’ for that period. The rate of interest which he pays, per hundred bales of cotton, is the number of bales that can be purchased with the following sum of money: the interest on the money required to buy spot 100 bales, plus the excess (or minus the deficiency) of the spot over the forward prices of the 100 bales. In equilibrium the spot and forward price coincide, for cotton as for any other commodity; and all the ‘natural’ or commodity rates are equal to one another, and to the money rate. But if, for any reason, the supply and the demand for a commodity are not in equilibrium (i.e. its market price exceeds or falls short of its cost of production), its spot and forward prices diverge, and the ‘natural’ rate of interest on that commodity diverges from the ‘natural’ rates on other commodities.” (Sraffa 1932a: 49).

Thus there could only be a single “natural rate of interest” in a one commodity economy, and, in an expanding economy, equating a market rate with a natural rate has no meaning. When an economy is not in equilibrium, where it is moving from one equilibrium to another, there will be as many natural rates as commodities and “under free competition, this divergence of rates is as essential to the effecting of the transition as is the divergence of prices from the costs of production; it is, in fact, another aspect of the same thing” (Sraffa 1932a: 50). Hayek appeared to acknowledge this:

“Mr. Sraffa denies that the possibility of a divergence between the equilibrium rate of interest and the actual rate is a peculiar characteristic of a money economy. And he thinks that ‘if money did not exist, and loans were made in terms of all sorts of commodities, there would be a single rate which satisfies the conditions of equilibrium, but there might, at any moment, be as many “natural” rates of interest as there are commodities, though they would not be equilibrium rates.’ I think it would be truer to say that, in this situation, there would be no single rate which, applied to all commodities, would satisfy the conditions of equilibrium rates, but there might, at any moment, be as many 'natural' rates of interest as there are commodities, all of which would be equilibrium rates; and which would all be the combined result of the factors affecting the present and future supply of the individual commodities, and of the factors usually regarded as determining the rate of interest” (Hayek 1932).

In reply, Sraffa noted:

“Dr. Hayek now acknowledges the multiplicity of the ‘natural’ rates, but he has nothing more to say on this specific point than that they ‘all would be equilibrium rates’. The only meaning (if it be a meaning) I can attach to this is that his maxim of policy now requires that the money rate should be equal to all these divergent natural rates” (Sraffa 1932b).

If the market rate of interest in an expanding economy must equal the “natural rate of interest,” how can it do so if there are many natural rates? Yet this is the central element of ABCT, even in modern expositions of it, as in R. W. Garrison (1997):

“The natural rate of interest is the rate that equates saving with investment. The bank rate diverges from the natural rate as a result of credit expansion” (Garrison 1997: 24).

A bank rate (market rate) can only diverge from a natural rate, if there was one natural rate of interest. But the concept of the natural rate of interest requires that there be multiple such “natural rates.” That this is a serious problem for the Hayekian version of the Austrian business cycle theory is acknowledged by Lachmann

“What is much less clear to us is to what extent Hayek was aware that by admitting that there might be no single rate he was making a fatal concession to his opponent. If there is a multitude of commodity rates, it is evidently possible for the money rate of interest to be lower than some but higher than others. What, then, becomes of monetary equilibrium?” (Lachmann 1994: 154).

And what becomes of ABCT? In order for natural rates to obtain, money and modern banking would have to be abolished, and the loans conducted in real commodities. This in fact appears to Lachmann’s solution to the conundrum:

“It is not difficult, however, to close this particular breach in the Austrian rampart. In a barter economy with free competition commodity arbitrage would tend to establish an overall equilibrium rate of interest. Otherwise, if the wheat rate were the highest and the barley rate the lowest of interest rates, it would be profitable to borrow in barley and lend in wheat. Inter-market arbitrage will tend to establish an overall equilibrium in the loan market such that, in terms of a third commodity serving as numéraire, say steel, it is no more profitable to lend in wheat than in barley. This does not mean that actual own-rates must all be equal, but that their disparities are exactly offset by disparities between forward prices. The case is exactly parallel to the way in which international arbitrage produces equilibrium in the international money market, where differences in local interest rates are offset by disparities in forward rates” (Lachmann 1994: 154).

In other words, the solution is a barter economy where modern banking is dismantled and goods are loaned out, and, if one commodity comes to serve as a numéraire, it will no longer have a store of value function and only function as a medium of exchange – a totally unrealistic world.

Finally, we can note how Hayek seems to have changed his defintion of the natural interest rate in later work:

“Hayek ... in his later and most systematic statement of capital theory, appears to accept this criticism of Sraffa’s and to abandon the strict in natura definition he had offered in earlier writings” (Cowen 1997: 95, n. 16).

And his attempt to devise a trade cycle theory free from the problems identified by his critics must be judged a failure:

“The combined effect was to start Hayek on a long process of rethinking his views. He hoped to reconstruct a more suitable capital-theoretic foundation, then turn to the problem with which he started, explicating the role of money in a dynamic capital-using economy. After seven years of work, he produced a four-hundred-page book, The Pure Theory of Capital [1941] ..., but still the task was unfinished .... Throughout the 1930s, Hayek kept responding to his critics, making adjustments to his models along the way, and this in turn brought fresh criticism and new adjustments. According to his own assessments, however, his efforts to build a dynamic equilibrium model of a capital-using monetary economy never reached fruition. His intended second on dynamics never appeared. As he suggested, by the late 1930s Hayek had turned his attention to ‘more pressing problems’” (Caldwell 2004: 180).

By the 1940s, Hayek had turned away from dynamic equilibrium theorising and moved to writing about the social sciences, philosophy, classical liberal political theory, and social philosophy.


Appendix: Mises and the Wicksellian Natural Rate of Interest Concept?

It seems that Mises also relies on the Wicksellian “natural interest rate” concept:

“At the end of ... [The Theory of Money and Credit] (388-404), Mises combined his theory of interest and his understanding of banking practice to point to a theory of economic crises. Following on Wicksell, he identified the gap between the natural rate of interest and the money rate as the consequence of credit expansion” (Vaughn 1994: 40).

But, according to Hülsmann,

“Wicksell defined the natural rate of interest as the rate that would come into existence under the sole influence of real (non-monetary) factors) ... He also defined it as the rate at which the price level would remain constant ... Both distinctions led to great confusion among later theorists, but Mises’s business cycle theory seemed to show that it was useful to make some such distinction. In Human Action he would eventually show that the relevant distinction is between the equilibrium rate of interest and the market rate. Both rates are monetary rates and can therefore coincide” (Hülsmann 2007: 253, n. 79).

What happened is that Mises changed his mind (Maclachlan 1996), and abandoned the Wicksellian natural interest rate concept he had used in the Theory of Money and Credit and adopted a new “originary interest rate” theory:

“Originary interest is the ratio of the value assigned to want-satisfaction in the immediate future and the value assigned to want-satisfaction in remote periods of the future. It manifests itself in the market economy in the discount of future goods as against present goods. It is a ratio of commodity prices, not a price in itself. There prevails a tendency toward the equalization of this ratio for all commodities. In the imaginary construction of the evenly rotating economy the rate of originary interest is the same for all commodities” (Mises 1998: 523).

But, as late as 1928 in Monetary Stabilization and Cyclical Policy, Mises is still using the Wicksellian natural interest rate:

“In conformity with Wicksell’s terminology, we shall use ‘natural interest rate’ to describe that interest rate which would be established by supply and demand if real goods were loaned in natura [directly, as in barter] without the intermediary of money. ‘Money rate of interest’ will be used for that interest rate asked on loans made in money or money substitute.” (Mises 2006 [1978]: 107–108).

“The ‘natural interest rate’ is established at that height which tends toward equilibrium on the market. The tendency is toward a condition where no capital goods are idle, no opportunities for starting profitable enterprises remain unexploited and the only projects not undertaken are those which no longer yield a profit at the prevailing ‘natural interest rate’” (Mises 2006 [1978]: 109).

This seems to reinforce the point that the Wicksellian natural interest rate concept as used in Mises’ earlier work had to be abandoned. But it is still used in Hayekian forms of ABCT. To the extent that Mises’ presentation of ABCT in the Theory of Money and Credit and Monetary Stabilization and Cyclical Policy (1928) relies on the Wicksellian natural interest rate concept, it must be judged as worthless as Hayek’s Prices and Production.

BIBLIOGRAPHY

Arestis, P. and M. Sawyer. 1991. A Biographical Dictionary of Dissenting Economists, Elgar, Aldershot.

Bellofiore, R. 1998. “Between Wicksell and Hayek: Mises’ Theory of Money and Credit Revisited,” American Journal of Economics and Sociology 57.4: 531–578.

Burger, P. 2003. Sustainable Fiscal Policy and Economic Stability: Theory and Practice, Edward Elgar, Cheltenham, UK.

Caldwell, B. 2004. Hayek’s Challenge: An Intellectual Biography of F.A. Hayek University of Chicago Press, Chicago and London.

Cowen, T. 1997. Risk and Business Cycles: New and Old Austrian Perspectives, Routledge, London.

Festré, A. 2002. “Money, Banking and Dynamics: Two Wicksellian routes from Mises to Hayek and Schumpeter,” American Journal of Economics and Sociology 61.2: 439–480.

Garrison, R. W. 1997. “Austrian Theory of Business Cycles,” in D. Glasner and T. F. Cooley (eds), Business Cycles and Depressions: An Encyclopedia, Garland Pub., New York. 23–27.

Hayek, F. A. von, 1931. Prices and Production, G. Routledge & Sons, Ltd, London.

Hayek, F. A. von, 1932. “Money and Capital: A Reply,” Economic Journal 42 (June): 237–249.

Hayek, F. A. von, 1935. Prices and Production (2nd edn), Routledge and Kegan Paul.

Hayek, F. A. von, 1939. Profits, Interest and Investment, Routledge and Kegan Paul, London.

Hayek, F. A. von, 1942. “Professor Hayek and the Concertina-Effect: A Comment,” Economica n.s. 9.36: 383–385.

Hayek, F. A. 1995. Contra Keynes and Cambridge: Essays, Correspondence (ed. B. Caldwell; Collected Works of Friedrich August Hayek, Vol. 9), Routledge, London.

Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism, Ludwig von Mises Institute, Auburn, Ala.

Kaldor, N. 1939. “Capital Intensity and the Trade Cycle,” Economica n.s. 6.21: 40–66.

Kaldor, N. 1940. “The Trade Cycle and Capital Intensity: A Reply,” Economica n.s. 7.25: 16–22.

Kaldor, N. 1942. “Professor Hayek and the Concertina-Effect,” Economica n.s. 9.36: 359–382.

Kurz, H. D. 2000. “Hayek-Keynes-Sraffa Controversy Reconsidered,” in H. D. Kurz (ed.), Critical Essays on Piero Sraffa’s Legacy in Economics, Cambridge University Press, Cambridge. 257-302.

Lachmann, L. M. 1994. Expectations and the Meaning of Institutions: Essays in Economics (ed. by D. Lavoie), Routledge, London.

Lawlor, M. S. and Horn, B. 1992. “Notes on the Hayek-Sraffa exchange,” Review of Political Economy 4: 317–340.

Maclachlan, F. 1996. “II. Macroeconomics, Inflation, Business Cycles: The Concept of the Natural Rate of Interest in Mises and Hayek,” Cultural Dynamics 8 (November): 295–308.

Mises, L. von. 2002 [1978]. On the Manipulation of Money and Credit, Ludwig von Mises Institute, Auburn, Ala. p. 129–130.

Mises, L. von. 2006 [1978]. The Causes of the Economic Crisis and Other Essays Before and After the Great Depression, Ludwig von Mises Institute, Auburn, Ala.
(this reprints Monetary Stabilization and Cyclical Policy (1928).)

Mises, L. 1998. Human Action: A Treatise on Economics, Mises Institute, Auburn, Ala.

Mises, L. von, 2009 [1953]. The Theory of Money and Credit (trans. J. E. Batson), Mises Institute, Auburn, Ala. p. 355.

Rogers, C. 2001. “Interest rate: natural,” in P. Anthony O’Hara (ed.), Encyclopedia of Political Economy. Volume 1. A–K, Routledge, London and New York. 545–546.

Selgin, G. 1999. “Hayek versus Keynes on How the Price Level Ought to Behave,” History of Political Economy 31: 699-722.

Shostak, F. 2008. “The Myth of the Neutral Interest Rate Policy,” Mises.org, February 8
http://mises.org/daily/1743

Sraffa, P. 1932a. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

Sraffa, P. 1932b. “A Rejoinder,”Economic Journal 42 (June): 249–251.

Trautwein, H. M. 1996. “Money, Equilibrium, and the Business Cycle: Hayek’s Wicksellian Dichotomy,” History of Political Economy 28.1: 27–55.

Uhr, C. G. 1994. “Knut Wicksell – A Centennial Evaluation,” in J. Cunningham (ed.), Knut Wicksell: Critical Assessments (vol. 3), Routledge, London. 72–103.

Vaughn, K. I. 1994. Austrian Economics in America: The Migration of a Tradition, Cambridge University Press, Cambridge and New York.

Vienneau, R. L. 2007. “Hayek Versus Sraffa,” February 19
http://robertvienneau.blogspot.com/2007/02/hayek-versus-sraffa.html

Vienneau, R. L. 2006. “Some Fallacies of Austrian Economics,” September
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=921183

Vienneau, R. L. 2010. “Some Capital-Theoretic Fallacies in Garrison’s Exposition of Austrian Business Cycle Theory,” September 4
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1671886

Wicksell, K. 1934. Lectures on Political Economy (trans. E. Classen), Routledge & Kegan Paul, London.

Debt Deflationary Crisis in the Late Roman Republic

We hear endlessly from free market ideologues about how inflation allegedly caused the collapse of the Western Roman empire (for a refutation of that, see my post “Inflation and the Fall of the Roman Empire,” June 12, 2011), but they never mention the rather important point that deflation and debt deflation were clearly factors in the economic and social turmoil that saw the fall of the Roman Republic in the first century BC and its replacement with the despotic Roman empire (for a timeline of Roman Republican history, see below).

During the Social War (91–88 BC), Rome was affected by a monetary crisis in which a shock to confidence (or fides in ancient Latin) and the uncertainty caused by the war led to hoarding of money. In Keynesian terms, there was a shift in liquidity preference, owing to the precautionary motive. The idle money that had been taken out of circulation caused a price deflation in commodities and land values (a real asset). Excessive private debt had always been a problem at Rome, and the deflationary troubles caused a debt crisis. This was made worse by King Mithridates VI of Pontus, who invaded Asia Minor, a Roman province, where Romans had lent out considerable sums of money. Repayment of Roman loans in Asia was threatened, which caused creditors in Rome to experience a liquidity crisis and to have trouble servicing their own debts. In turn, other creditors were bankrupted. In other words, a financial crisis followed the deflation (Barlow 1980; see also Lovano 2002: 70–73). Does this sound familiar?

C. T. Barlow explains what happened:

“Land prices probably began to fall again. When the creditors foreclosed, they put more land on the market just when the supply of money was short. This glut on the market, together with the shortage of money, caused land prices to drop swiftly. As the value of most collateral fell, more creditors probably foreclosed, and the collapse quickened. Fides [i.e., confidence] had to give way, undermined by the Social War and the narrow supply of money. Sulla’s march on Rome and the Bellum Octavianum [i.e., the civil war in 87 BC when the faction of Marius occupied Rome] worsened the situation because they paralyzed the government. Meanwhile Rome suffered through a period of general deflation, depressed land prices, and little or no credit. The government could not act until 86 …” (Barlow 1980: 216).

It is not surprising that this debt deflationary crisis coincided with the first period of severe political crisis in the Roman republic in which the state degenerated into open civil war between the supporters of the aristocrat Lucius Cornelius Sulla (c. 138 BC–78 BC) and the popular leader Gaius Marius (157 BC–86 BC), who was the uncle of Julius Caesar. In 88, Sulla had used his army to invade and oust the faction of Marius. When Sulla left for the east to fight the Pontic king Mithridates, the forces of Marius and Cinna won control of Rome (Bringmann 2007: 192).

Although it is anachronistic to talk about solid and clear party politics in ancient Rome, there were nevertheless two loose and broad political movements:

(1) the Optimates and
(2) the Populares.

The Optimates (“the best men”) were traditionalist supporters of the power of the Senate against the people, while the Populares were more favourable to the people and acquired power through the popular assemblies and the office of the tribunate. To the extent that the Populares had a political agenda, it consisted of land reform, food supply, the welfare of the people and debt relief (Wiseman 2009: 14). The major Populares leaders were Gaius Marius, Lucius Cornelius Cinna, Publius Clodius Pulcher, Marcus Licinius Crassus and Julius Caesar.

With popular control of the government from 87 under Cinna, a solution to the debt crisis was implemented, and Cinna’s fellow consul Valerius Flaccus pushed through debt relief:

“The government could not act until 86, when [sc. the consul] L. Valerius Flaccus carried a bill providing debt relief. The need for some such remedy was generally acknowledged, since the lex Valeria de aere alieno passed, in Sallust’s words, ‘with all good men agreeing’ ... The lex Valeria cut all debts by three-fourths, including the government’s. If the vicious circle of foreclosures and falling land prices were to be broken, debts had to be brought into line with land prices, so that debts and the value of their security would balance. The 75% reduction in debts probably reflects the deflation of land prices since 88 and the general deflation caused by hoarding and the shortage of coins in circulation. The lex Valeria brought debts down to the point where land prices and the supply of money could support them. Balancing debts and land prices helped to restore the credit structure and this to resurrect fides [i.e., confidence] ... Sallust indicates that the lex Valeria brought the poor some relief from their debts. If the law brought debts into line with land prices, it would have stopped many foreclosures and saved some small farms. No doubt the wealthy too took advantage of the law, as did the commercial classes. The moneylenders suffered a paper loss, but in reality they probably lost little. With the lex Valeria they now had a chance to recover at least part of their capital. If they foreclosed they still received the same property as before. Furthermore, when they collected on their loans, they received the deflated currency of 86, not the currency of 89 or 88: in real values they may have lost almost nothing” (Barlow 1980: 216).

While action in 86 averted further crisis, this was the first of a number of debt crises of the late Republic, and the role of debt and debt deflation in the fall of Roman Republic cannot be ignored. There were other outbreaks of debt crisis, perhaps exacerbated by deflation in the late Republic:

(1) In 63 BC when the senator Catiline led a conspiracy to overthrow the government by drawing on support from over-indebted segments of the population.

(2) In 47 BC, violent strife broke out between Publius Cornelius Dolabella and Mark Antony over debt relief legislation, with Julius Caesar eventually coming out in support of rent relief (Bringmann 2007: 264).

(3) Caesar had to take further measures to deal with a debt and credit crisis in reforms he implemented down to 46 BC (Bringmann 2007: 271).

These problems are summed by M. Aglietta:

“struggles between debtors and creditors tore the political elite [sc. of the Roman Republic] apart. It occurred in the Catiline conspiracy (64 to 62 B.C), the civil war triggered by rivalry between Caesar and ... [Pompey] (49 to 44 B.C) and acute indebtedness under Tiberius (32 to 33 A.D). In these episodes patrician debtors could gain the support of plebeians who were structurally in debt. Because of the importance of keeping assets in the political arena, debtors refrained from selling their estates to settle their debts, lest land prices fall and depreciate their assets. At times of acute political strife, financial crises could trigger a drying up in circulation through hoarding of the means of payments due to concerns about political instability. The velocity of money in circulation changed abruptly. Solving the debt crisis was the precondition for restoring normal payments. It depended on the structure of political power within the state, which was much different in the Republic and the Empire. In the Republic the men wielding the ultimate power were partisans in the financial struggle. Such was Cicero in 63 who imposed the interests of the creditors by sheer violence. In the Empire, the authority rested beyond the conflicting interests. The Emperor was intent on compromising by rescheduling the debts, partially reducing them in principal or in interests, and granting gifts or low-interest loans from the state” (Aglietta 2002b: 20–21).

I have provided a Timeline below of Late Republican history.

TIMELINE OF THE LATE ROMAN REPUBLIC

133 BC – Tiberius Gracchus elected tribune in 133 BC.

123 BC – Tiberius’ brother Gaius Gracchus elected tribune.

121 BC – Gaius Gracchus murdered when he stood for election as tribune for a third term.

112 BC – Roman Senate declares war on Numidia.

112 BC–105 BC – Jugurthine War.

late 110/early 109 BC – Jugurtha defeats Roman army led by Aulus Postumus Albinus.

107 BC – Marius elected consul.

105 BC – Marius was elected consul.

104 BC–100 BC – Marius serves as consul for five successive terms.

104 BC – Marius returns to Rome by January 1, and celebrates his triumph over Jugurtha.

91–88 BC – Social War.

91–86 BC – Debt deflationary crisis.

88 BC – King Mithridates VI of Pontus (king from 120 BC to 63 BC) invades Asia Minor and causes the massacre of 80,000 Romans and Italians.

88 BC – Lucius Cornelius Sulla (c. 138 BC–78 BC) and Quintus Pompeius Rufus are consuls. Sulla invades Rome and defeats the populares.

87–84 BC – Sulla fights the Mithridatic war.

87 BC Marius and Cinna occupy Rome and kill their opponents. This was called the Bellum Octavianum.

86 BC – Gaius Marius dies on January 13.

86–84 BC Rome dominated by Cinna.

83 BC – Sulla ends war with Mithridates and marches on Rome.

83–82 BC – Civil war between Sulla and the party of Caius Marius the younger and Cinna.

82 BC – Victory for Sulla at the Battle of the Colline Gate.

end of 82 BC/early 81 BC – the Senate appoints Sulla dictator legibus faciendis et reipublicae constituendae causa (“dictator for the making of laws and for the settling of the constitution”), without a term limit.

82–80 BC – Constitutional reforms of Sulla.

end of 81 BC – Sulla resigns his dictatorship.

80 BC – Sulla holds the consulship.

70 BC – Pompey and Crassus elected consuls and dismantle significant parts of Sulla’s constitution.

63 BC – conspiracy of Catiline defeated by the consul Marcus Tullius Cicero.

62 BC – Pompey returns from Asia.

59 BC – First Triumvirate (59–53 BC) is formed and includes Gaius Julius Caesar, Marcus Licinius Crassus, and Gnaeus Pompeius Magnus.

59 BC – Caesar and Marcus Calpurnius Bibulus become consuls.

59 BC – Caesar becomes governor of Cisalpine Gaul, Illyricum and Transalpine Gaul.

57–51 BC – Caesar conquers Gaul.

52 BC – January, Clodius is murdered in a gang war by Milo.

49 BC – 7 January, the senate passes a senatus consultum ultimum. Caesar crosses the Rubicon on 10 January.

49–46 – Civil war.

45 BC – Caesar defeats opponents in the Battle of Munda in March 45 BC.

46 BC – Caesar defeats Republican forces in Africa. Cato commits suicide.

44 BC – Caesar assassinated.

43–33 BC – Second Triumvirate is formed on 26 November 43 BC, and consists of Octavius (Augustus), Marcus Aemilius Lepidus, and Mark Antony.

42 BC – Republican forces defeated by Mark Antony and Gaius Octavian at Philippi in October.

31 BC – Gaius Octavian defeats Antony at the naval Battle of Actium on September 31. Beginning of the Roman empire.

29 BC – Octavian accepts the title of Augustus.


BIBLIOGRAPHY

Aglietta, M. 2002a. “Whence and Whither Money,” in The Future of Money (OECD Forum for the Future. Conference, 2001: Luxembourg), OECD, Paris. 31–72.

Aglietta, M. 2002b. “Money: A Matter of Credit and Trust,” Les journées internationales d’économie monétaire et bancaire, Lyon, 6–7 June 2002.
http://www.univ-orleans.fr/deg/GDRecomofi/Activ/doclyon/aglietta.pdf

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