How would the Romans handle the financial crisis?

Tue, 01/27/2009 - 12:36pm

The latest round of massive corporate layoffs reminds of the financial crisis the Roman Empire suffered in 33 A.D.

It all began when Emperor Tiberius enforced a ceiling on interest rates, which caused a severe credit crunch, Tacitus relates in The Annals (book VI, 16-17). "Hence followed a scarcity of money, a great shock being given to all credit, the current coin too." This was of course followed by deflation of the sort we are seeing now in housing -- "a fall of prices, and the deeper a man was in debt, the more reluctantly did he part with his property, and many were utterly ruined." This is what business nowadays terms "distressed sales."

The Roman equivalent of the Fed then pumped tons of money into the financial system, and also cut interest rates to zero, which is about where we are now in our own mess. As Tacitus puts it:

The destruction of private wealth precipitated the fall of rank and reputation, till at last the emperor interposed his aid by distributing throughout the banks a hundred million sesterces, and allowing freedom to borrow without interest for three years, provided the borrower gave security to the State in land to double the amount. Credit was thus restored, and gradually private lenders were found."

Tiberius also raised funds by accusing Sextus Marius, the richest man in Spain, of incest -- almost certainly a trumped-up charge -- and then having him thrown headlong from the Tarpeian Rock (see below), a cliff at the edge of Rome's Capitoline Hill. "Tiberius kept his gold mines for himself," Tacitus notes. It makes me think that Wall Street is getting off easy.

Should Barnabas Francus hold the next hearing of his House banking committee atop this cliff?

photo from Wikicommons

Thomas E. Ricks | Permalink | | Comments? Login or register


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Wrong Historical Analogy

by Steven Thomas Smith on Tue, 01/27/2009 - 1:33pm

Thumbs up, but only if the historical analogy is apt. The Roman credit crisis you cite was caused by inept policy, namely, "interest was reduced to [5%], and finally compound interest was wholly forbidden."

The Roman illiquidity problem was quickly fixed by ZIRP and liquidity injections, and is completely different than the insolvency crisis of present.

What's worse, you never made even an implicit joke about the TARP and the Tarpeian rock, but perhaps you believe that your readership is very, very sophisticated.

Perhaps a better analogy to this crisis is the 14th century currency bubble financially engineered by Venice in her interests:

Venetian finance which, by dominating and controlling a huge international "bubble" of currency speculation from 1275 to 1350, rigged the great collapse of the 1340s. Rather than sharing with their "allies", the bankers of Florence, the merchants of Venice bankrupted them and the economies of Europe and the Mediterranean with them. ... Venice had deliberately ensnared all the surrounding subject economies, including the German economies, for her own profit. ... Venice broke and replaced the European silver coinage of the Holy Roman Emperors, immediately leading into the 1340s' financial blow-out, which blew-out all the financiers except the Venetians. ... Venice's rulers were less concerned with profits from industries than with profits from trade between regions that valued gold and silver differently. Between 1250 and 1350 Venetian financiers built up a world-wide financial speculation in currencies and gold and silver bullion, similar to the huge speculative cancer of Derivative Contracts today. It took all control of coinage and currency from the monarchs of the time.

Refererences to the Florentine Crisis

by Steven Thomas Smith on Tue, 01/27/2009 - 3:59pm

Whoops, though the quoted text is accurate, I unfortunately used the first link in a web search. Google books has a lot more from reputable sources on this crisis:

Tiberius

by eastgate on Fri, 01/30/2009 - 3:24pm

My understanding of early imperial economics may be out of date, but Tacitus might be relying somewhat too heavily on the interest rate question. A major deflationary force, as I recall, was Tiberius' own reluctance to spend lavishly.

A curious effect of Octavian's consolidation was that his personal fortune represented not merely a vast concentration of wealth but a very large fraction of the liquid assets of the known world. A big factor here was Egypt, which was the final dangerous rival; not only did Egypt have tremendous trade resources and a terrific economy, but the royal treasue consolidated a huge reserve of the entire Hellenistic east. Egypt was too dangerous to turn over to the state, so it remained the private property of the emperor. So, Tiberius didn't just have a bigger bank account that other people; his personal balance sheet looked like a sovereign bank.

So, switching from a decision-maker who was always a showman and who *liked* public projects to one who liked to live simply (and whose image emphasized fiscal prudence), and you have lots of money not being spent: Hooverism in spades, or Treasury View with a vengeance.