While his enemies were being defeated abroad, Octavian also had been consolidating his power in Rome. He was helped by the growing impatience of Rome with Antony's alliance with Cleopatra, and he had himself appointed (31 BC) general against Antony. After the naval battle off Actium, which Agrippa won over Antony and Cleopatra, Octavian controlled all Roman territories. Although he began to reform the city and the provinces, he never returned control of the state back to the people.

He did, however, give the impression that Rome had gone from a military dictatorship to constitutional rule. He established no court, and he considered himself, at least publicly, not the ruler, but rather the first citizen of the republic. The senate delighted to honor him: in 29 BC he was made imperator [Lat.,=commander; from it is derived emperor], in 28 BC princeps [leader; from it is derived prince], in 27 BC augustus [august, reverend], in 12 BC pontifex maximus [high priest], and a month (Sextilis) was renamed Augustus (August) in his honor.

In his effort to hold the borders set by Caesar, he attempted to create a buffer state of the German territory between the Rhine and the Weser (or the Elbe). This led to a rebellion in AD 9 by Arminius in which Varus was defeated. This was the only real reverse Augustus suffered.

Augustus's reforms, which were far-reaching, fostered a revival of Roman tradition. He divided the provinces into two classes—senatorial, ruled by a proconsul chosen by the senate with a term of one year, and imperial, in charge of a governor solely responsible to Augustus with an indefinite term. To control the provinces Augustus encouraged local autonomy in administrative matters and allowed ethnic customs and cultural patterns to to flourish. He also spread the army throughout the empire; before this Italy had been burdened with a huge standing army.

Augustus studied the plans of Caesar for colonization throughout the empire. In economic policy, he supported business and industry. He made taxation more equitable and had general censuses taken. Knowing that the roads were the arteries of the empire, he lavished expenditures on them. He built a new forum, beautified the streets, improved housing conditions, and set up adequate police and fire protection. He was munificent to arts and letters, and he was a close friend of Maecenas and a patron of Vergil, Ovid, Livy, and Horace. He was succeeded by his stepson Tiberius.

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