Aired on January 8, 2020, Bill English talks with Carmen on Mornings with Carmen on Faith Radio about what we can learn from the economic collapse of 33AD in Rome. Here are the show notes:
Two precursors
First – Tiberias – the King has self-exiled himself away from Rome on the island of Capri. He’s not interested in politics and is “mailing it in”. Because of his absence, The Senate is aimless and headless. It is acting a confused and incoherent way.
Hence, the Senators start fighting with each other – each hoping to land a better job within the Roman government – but since Tiberias is not engaged, it is even more difficult to get his approval for these well paying, prestigious jobs.
At the top of these prestigious jobs was the consulship. There two in Rome. These two positions split the empire geographically and had a power called the parium, which meant they could issue a command and expect immediate and full compliance. They had power over life and death. The managed courts, called assemblies, led armies and then, after one year, they were sent off to govern provinces.
So, in their quest to “get to the top”, a few of these Senators look back at the old laws and they find laws that are 100 years old which still applied and were legal at that time.
The laws stipulated that they (the elite) couldn’t lend at interest and that their land portfolios be heavily weighted with land in Italy. So these Senators and other elites start to use these laws to bring each other to trial, in the hopes that the legal process will harm their opponent enough that their opponent will not be selected by Tiberius for these plum government jobs.
The sudden enforcement of these two laws, which had not been enforced for decades, was the reason Rome found themselves in the financial panic of 33AD.
Here was the domino effect of the sudden enforcement of these two laws:
First, the banks foreclosed on all their loans, demanding that they be paid back immediately, as they believed this was the only way to stay in compliance with these old laws.
Secondly, the people who owed the banks money had invested that money in land, so they had to rush out and sell the land at rock-bottom prices just to pay back the loans. As everyone sells land at the same time, the price of land collapses and Rome starts to experience Deflation.
Thirdly, the rich elite who had loaned money to the banks, now needed to be paid back themselves so they could buy land in Italy in order to come into compliance with the old laws. But the banks could not pay back their own loans to these rich elite people fast enough, so there was a type of “run on the banks” in which their creditors – the rich elite – all withdrew whatever money they could in order to buy land. This resulted in a shortage of cash for the entire economy and land prices devalued significantly. Fortunes were being lost and the elite’s status and reputations were being harmed.
So Tiberius comes riding to the rescue. He orders a bail-out for the rich in that the government will lend money to the rich interest-free, 3 year loans to infuse liquidity in the marketplace. The government takes land as collateral.
Land prices stabilized, loans were repaid and reputations were saved. It was a bail-out for the 1%.
What can we learn?
- A sudden infusion of too
much of a good or service will drive down the market price for that good or
service.
- Hence, when the government subsidizes an economic activity, they drive down the price of that activity to price levels which are artificial
- When the land was offered for sale at the same time, it drove down the market prices
- When government infuses money into an economy to keep it from collapsing, usually the wealthy are the ones who gain the most benefit from that bail-out.
- When laws are passed which defy economic laws are passed, the enforcement of these laws will have negative effects economically. For example, It’s not right for people to borrow money and not pay interest on that money. If government takes away the profit-motive to borrowing money, then credit will dry up and only a few people will be able to make large-price purchases.
- Without the Rich investing their money, job creation is severely limited.