Sri Lanka ancient economy may have been hit by monetary debasement: economist
Feb 10, 2009 (LBO) - A period of prosperity based on international trade, under an ancient Sri Lankan king may have declined following monetary debasement, as well as a decline in external trade, a top economist in the island said.
Central Bank Deputy Governor W A Wijewardene says, during the reign of king Parakramabahu the Great (1153-1186) Sri Lanka may have been the most prosperous nation in the world, when he ruled from Polonnaruwa.
This was estimated by historians, by taking into account the vast amount of capital projects carried out during his time, which was estimated to have been greater than in China which was the most developed nation in that time.
The economic activity, or gross domestic product, needed to support such activity would be a multiple of that expenditure.
Sri Lanka's prosperity had been brought by King Parakramabahu by building irrigation works and developing agriculture, boosting international trade and having a foreign policy that made the island an important centre.
According to Culawamsa, a historical narrative, King Parakramabahu had studied the writings of Chanakya or Kautilya, probably the world's first economist, Wijewardene said, delivering the 2009 Independence Day anniversary lecture at the Central Bank.
To support his campaigns to unify the country and generate revenue, he had first set up what was probably an export processing zone, which was called, Antharangadura Bethma in an area bordered by present day Kalutara, the Benthara River and the Sinharaja forest.
From this area, timber, ivory, pearls, gems and spices had been exported to earn revenue so that the tax burden of domestic citizens would be lower.
During his reign, Sri Lanka had been so globalized, that ships had sailed to China, Cambodia, Burma and Bengal. Goods had also been brought from Persia, Egypt, Greece and Rome.
"During that time, Sri Lanka had played the role to the world, that Singapore plays today in entrepot trade," Wijewardene said.
Traders from the East and West had come to Sri Lanka to buy goods. The king had also known many languages, and a training school had also taught foreign languages to government officials, along with other arts.
Sri Lankan archeologist Senarath Paranavithana, quoting Idris, an Egyptian historian, had written that from the countries of Arak and Persi shiploads of liquore had arrived in Sri Lanka and had been bought by the king and re-sold under a monopoly.
In 2002, Wijewardene had visited Iran and had been taken to the region called Arak which was near the Turkish border.
Though alcohol was not permitted in present day Iran, in the Arak region, even now a fermented beverage was being made of pomegranate, for medicinal purposes.
King Parakramabahu had also gone to war against Burma to defend free trade. Burma had imposed a tax on Sri Lankan exports.
According to Culawansa, Burma had slapped a 200 percent import duty. As a result, a Sri Lankan elephant which was earlier sold for 1,000 silver coins, went up to 3,000 coins.
This made elephants from Bengal cheap, and resulted in a military campaign. Sri Lanka had also been building ships.
During and before the reign of king Parakramabahu, there had been evidence that Roman coins had been used for international transactions.
"Roman coins played the role US dollars do now," says Wijewardene. "Roman coins had been found from all over Sri Lanka; from Jaffna, Dondra, Batticaloa, Colombo, Anuradhapura and Polonnaruwa, from different times."
The numismatist Osmond Bopearachchi, had identified counterfeit Roman coins. In place of the Latin words 'Hail Caesar', the fake coins had a wreath of flowers. The Sri Lankan coins were also cast rather than being struck.
During the 12th century the Roman Empire was going into decline, and international trade could have been depressed, reducing the demand for Sri Lanka's exports.
There may have been a shortage of Roman coins, giving an opportunity for Sri Lanka to produce coins.
"If sufficient volumes of money are not available, people have to resort to barter, where transactions costs are very high," says Wijewardene.
But the unrestrained production of money could also have serious negative effects.
Both Paranavithana and H W Codrington, another historian had found that gold coins disappeared from usage during this time. It had been attributed it to a decline in prosperity.
But it was more probable that the import of soldiers and craftsmen as well as international trade had resulted in the flow of gold out of the country, resulting in a 'balance of payments crisis.'
Sri Lanka had made coins from base metals, and dipped them in gold.
By issuing a coin at a cost less than face value, rulers throughout the ages had made profits or 'seigniorage' from money issue.
"King Parakramabahu, without using gold coins, may have gone to base metals to reduce the cost of coins issue and maximize seigniorage.
"But the negative effect of this is, for foreign buyers Sri Lankan goods become more expensive, or overvalued and over time international trade declines."
Economists have pointed out that such events had happened innumerable times in history. Debasing coins with cheaper metals is equivalent to 'printing' excess money by a modern central bank, to finance state expenses.
This can result in rapid price rises or an 'inflation tax'. History shows that under the Roman emperor Diocletian, coinage was debased with copper, resulting in high inflation which led to one of the earliest price control laws in history, in the year 301.
Rome went back to gold under Constantine the Great. Issuing debased coins also drives out 'good' or gold money out of circulation as people hoard the real gold coin, which is usually described as 'Gresham's Law.
Within fifty years of King Parakramabahu, Polonnaruwa, which was the capital, had gone into decline. In 1200 a foreign invasion dealt a blow to the city.
But within a year after his death, the Culawansa has made completely different statements about Parakramabahu, saying the next leader had freed the population from high levels of taxation and returned properties taken by force.
Wijewardene says this shows that history was the same as the present, and people should study history so as not to make the same mistakes again.