Monetary stability and the rule of law

• We explore the relationship between monetary stability and the rule of law.
• Modern data suggest that high inflation is associated with low rule of law.
• We develop three historical case-studies to understand the mechanisms driving this relationship.
• We consider what recent failures in monetary policy mean for the rule of law.

This paper investigates the relationship between the functioning of money and the rule of law. We explore the claim that monetary stability is a necessary condition for the rule of law to operate and that periods of rapid inflation and deflation stemming from monetary instability erode and undermine the rule of law. We support our argument with panel data evidence and four detailed case studies from the Roman empire, the Weimar Republic, the Great Depression and the Great Recession. Our conclusions examine what monetary institutions are most conducive to maintaining monetary stability and the rule of law.