The Two Empires
A comparison of EU economic policy with the late-Roman economy
Religious scholars traditionally agree on 33AD as the official date that the historical Jesus of Nazareth was crucified under the order of Roman prefect Pontius Pilate. What is less well known is that this was also the date of the first ever recorded economic crisis, which almost brought the entire Roman economy to its knees.
It all started when trading firm Seuthes & Son, an important Alexandria spice trader, lost three well-laden shipments in a hurricane half-way through crossing the Red Sea. Soon afterwards, another wealthy firm at Tyre, Malchus & Co., suddenly became bankrupt after its Phoenician workforce went on strike and the embezzlements of a freedman manager caught up with the company.
All of this would not normally have any impact on the Via Sacre, the Wall Street of Rome, except that word on the Via was that the biggest lender to both firms was the great Roman banking house of Quintus Maximus & Lucius Vibo, which had loaned largely to both Seuthes and Malchus.
A bank-run commenced, where those who hold money with a bank lose confidence in its ability to pay-up, and the bank closed up shop, refusing to pay back the money it owed to its creditors. This began further rumours that the even bigger banking house of Brothers Pettius was involved, which then also closed its doors, and the economic foundations of a political system which housed around 50 million people began to quake.
What followed has been called the first case of quantitative easing (QE) ever recorded, where a central government - in this case the Emperor Tiberius - stimulates a bank’s ability to lend by simply handing over cash from the treasury in Rome.
We know that the financial crash of 33AD caused a stir because ancient writers like Tacitus and Suetonius, who were otherwise anemic to writing about economics, made the effort of recording it. The bigger surprise is that Tiberius’ solution largely made the problem disappear, as far as the record shows, and we arrive back at the happy conclusion that QE worked out well for everyone involved.
Fast forward 300 years however, and the Roman economy is not in good shape. Emperor Diocletian is now in power, a title he now shares with three other figures in a political formation known as the Tetrarchy. The once cornerstone currency of the denarius has been debased by past Emperors, meaning that its silver content has been reduced from about 97% under Emperor Tiberius to just below 2% under Emperor Aurelian, Diocletian’s predecessor. To make matters worse, inflation is rampant.
The economic policies of the late Roman Empire bare little semblance with those implemented by Emperor Tiberius (at this point, it is only fair to point out that any policies attributed to Tiberius were likely made on behalf of him by Praetorian prefects Lucius Aelius Sejanus and Quintus Naevius Sutorius Macro.) But they can be compared with another political entity, one which has employed QE extensively throughout Europe after surviving what modern scholars now term the largest economic crisis since the great depression.
I speak of course about the European Union (EU), which has spent the last decade stimulating banks with monetary injections in quite the same way as the Roman treasury did, only with more immediate consequences. The two entities are almost two millennia apart, but a little economic scrutiny suggests that they have both tackled similar problems.
The European Union and QE
EU economic policy currently spends a lot of time in a tug-of-war between France, which favours a Eurozone budget and further financial integration, and Germany, which understandably wants to impose harsher economic restrictions on member states it has to bail out. Germany is unlikely to agree to further economic integration until it can assure voters it will not be footing the bill for southern-European countries, and France does not have the firepower to push through its reforms - so the Union now finds itself in a stalemate between its two largest post-Brexit members.
One of the largest debates which rages on between those who want further implementation and those who want member states kept at arm’s length, is the issue of centralised euro bonds. These would be bonds issued by an independent European treasury, backed up by the treasuries of each individual member state, and could therefore obtain funding for the Eurozone as a whole. (These are not to be confused with bonds issued in another currency overseas by a different sovereign entity, which are also, confusingly, called eurobonds.)
One of the main issues during the crisis was that the European Monetary Union (EMU) didn’t, and still doesn’t, have a way of transferring cash from stronger to weaker economies in times of emergency. Issuing debt via bonds is normally a great way to get money in times of duress, but if you are doing so using a currency you do not directly control, the result is you end up with a lot of personal debt and a return which is shared equally with every other member state.
Financial discipline has been strengthened since the crisis, but countries like Italy have an incentive to circumvent the financial rules, and without an agreed mechanism of integration which can satisfy both a distrustful electorate and economic sticklers, the Eurozone is stuck in a halfway point where it can neither grow nor retreat.
The result has been a backlash against the EU in the form of populists, who prioritise their own nation’s sovereignty, particularly its financial independence, above that of the EU’s. The problem for countries which have joined the euro however is that they cannot lower the value of their currency in order to absorb financial shocks the way other economies can, and they may forever be stuck halfway-integrated into a fiscal union which needs further assimilation to survive.
In order to compare this with the late-Roman economy, we need to take a step back and view the policies side-by-side.
The late Roman Empire
Emperor Diocletian’s reforms were sorely needed by the time they came into force. The empire had been beset by invasions, endured dozens of emperors, who were either assassinated or implemented a dictatorial regime in order to survive; and had gone through more civil wars than any country which currently exists.
His reforms included issuing a completely new mint of Denarius, made up of a generous amount of silver in order to combat the problem of debasement. The tax system was also reinvented, with cities and states only taxed on the goods they traded in order to covert financial independence and reduce economic reliance on Rome. (This, incidentally, contributed greatly to the rise of feudalism in Europe as provinces were able to survive independently of the Western Roman Empire after its collapse through restricting trade.)
But despite all his efforts, Diocletian found himself in a similar position to EU policy makers, taking up his job 1,700 years later. The Roman provinces wanted to integrate, and they wanted to be part of Rome, the problem was they did not all want to pay more taxes than they could avoid.
Diocletian and his advisors made two key mistakes when issuing the newly minted currency:
They did not recall the old Roman currency:
The problem they correctly identified was that the old currency had so little silver value that merchants had simply stopped accepting it. If the money that the treasury used to pay its soldiers was worthless, then Rome would always be vulnerable to a coup-d'etat; which had happened on many occasions before. This solved the problem of Roman coins being debased, but it did not solve the problem of inflation.
To give the Romans their due, they did not accurately understand inflation the way modern economists understand it. The problem was that the new coins just ended up being added to the enormous amount of cash already in circulation. Soldiers who arrived at merchant stalls with more cash than before showed those whose goods they purchased that they were now better off, and could now afford to purchase more expensive goods. The merchants simply raised the price of whatever they were selling in-line with any new currency injected into the financial system.
Diocletian tried to combat this by putting price-caps on different goods. This policy was only very short lived as it soon proved to be unenforceable. It reflects a policy employed in the Soviet Union, and still used today in Cuba, where restaurants and other stores can only charge a set price. Cuban innovators get round this problem by charging a premium for anything not involving the food. Entrance? Ten pesos. Want to see the menu? Three pesos. Faster service? Five more pesos. Roman merchants got round Diocletian’s policy in much the same way.
They did not shut down the minting factories in the other provinces:
Adding to this problem was the fact that every other Roman province was in possession of a minting machine, and so had the option of printing as much money as they wanted. When Rome came to collect its taxes, province officials would look at the local treasury, see that it was empty, and then proceed to print as much money as they needed in order to pay the tax that was owed.
Needless to say, this added to the problem of inflation. The issue Diocletian was facing is the same issue now faced by EU legislators; how to further integrate member states without them relinquishing control of their financial autonomy.
The result was that Rome reverted back into a state of civil war after Diocletian retired to grow cabbages and the Tetrarchy collapsed. Diocletian's policy of preserving a stable silver coinage was abandoned, and the gold solidus became the empire's primary currency instead. The economic reforms, however well meaning, were only ever a temporary patch for a leaky ship already half sunk, and the final century of Rome saw her sink beneath the waves.
Financial Crisis 2.0
Much like the Romans did not fully understand what leads money to inflate, our own understanding of what causes credit cycles to downturn is insufficient. Indeed, prior to the 2007 - 2008 global financial crisis (GFC) there was a wide-spread belief that economic crashes were a thing of the past. Two years ago, almost every mainstream media publication was predicting a new economic implosion on the ten-year anniversary of the collapse of Lehman Brothers, a deadline which has now been pushed back to 2020 or 2021.
Likewise, we do not have sufficient data to determine if the huge amounts of government debt held by the USA, Portugal, Spain, Italy, and Japan will drag countries down into economic abyss during the next downturn, or if countries like Switzerland, which sacrificed a maneuverable banking sector for a clean balance sheet, will perform just as badly if not worse.
The next economic downturn will prove a good indicator as to whether quantitative easing can be sustained indefinitely, in the same way that Tiberius was able to make a financial crash disappear with a wave of the hand, or show us the early warning signs that we are mired in a muddy financial system craving further economic integration which never seems to arrive.
When Diocletian was confronted in his retirement home by his life-long friend and co-ruler Maximian, who urged the retired emperor to come back to political life and restore the empire after it descended into civil war, he responded with the following:
"If you could show the cabbage that I planted with my own hands to your [new] emperor, he definitely wouldn't dare suggest that I replace the peace and happiness of this place with the storms of a never-satisfied greed."
Angela Merkel, in many ways the architect of the modern EU project, has already announced her retirement. It remains to be seen after the next economic crash whether she will keep her word and follow the path set by Diocletian, or instead turn out as Maximian did, and refuse to see her life’s work crumble into ruin.