QE for People – Even the Ancients Were Doing it! (A History of Public Money Creation Part 3 of 8)

Throughout history, Public Money Creation has been the norm, rather than the exception. What can we learn about money creation from Ancient China and the Roman Empire?

Throughout history, governments have used their ability to create money to fund public spending. While none of these policies were called, “People’s QE”, “Strategic QE”, “Sovereign “Money Creation”, or “Helicopter Money” (what Positive Money collectively refers to as Public Money Creation), they shared the common trait of using newly created state money to finance government spending, rather than relying on commercial banks to create new money through lending.

The times when Public Money Creation has resulted in high inflation or even hyperinflation (inflation of over 50% a year) have been well documented. However, the times when governments have created money in a careful and responsible manner to grow the economy are usually ignored or overlooked. At Positive Money, we want to set the record straight and bring to light the many case studies where Public Money Creation has successfully boosted the economy without leading to economic disaster.

In our previous posts on this topic, we showed that theory and analysis have been dispensed with at the expense of this widespread misconception. We also showed that misleading conclusions have been drawn from the case studies of Public Money Creation in Zimbabwe and the Weimar Republic. In this post, we try and draw some lessons from Public Money Creation under the Roman and Chinese empires.

The Roman Empire

In a recent book, Stanley Ku (2015) writes that the money creating powers of the Roman republic were both critical to the initial success and eventual collapse of the Roman Empire. Some important lessons can be derived.

“The early Roman republic used bronze as its currency and this choice had an important role in enabling Rome’s rapid rise. Initially, ingots with government markings called the aes signatum were used as the currency of Rome…Very soon, the aes grave were coined and these carried purchasing power by law – at the marked value, above the commodity value of the bronze used. By choosing bronze, which was abundant in the surrounding Etururia region, Rome could sidestep gold and silver, which was rare in Rome’s vicinity. This freed Rome from the disruptions and influences of the Greek elites and allowed Rome to mobilize resources as it saw fit, without being constrained by availability of gold or silver. While Rome did not have much gold or silver, these metals were not what it needed for production and for the development of society anyway.”

Ku (2015) then suggests that the Roman authorities were able to capitalise on the state’s ability to create money because of the strong institutions governing the state’s actions:

“It should be noted that, the choice of bronze coins as currency was feasible only because of Rome’s superior form of government, with its checks and balances and its rule of law, thereby ensuring self restrain in the issuance of currency. The Roman Republic was able to keep this very effective system of bronze currency for more than two hundred and fifty years, until about 224 BC.”

Accordingly, in the early ages of the Roman Empire the state was able to proactively create money for productive purposes because there was an appropriate system of check and balances. Furthermore, as the Roman Empire expanded, and the Roman economy grew, more and more businesses/consumers would most likely require more of the Roman currency to settle their respective transactions. That is as economic activity grew, and the amount of economic transaction expanded, there was likely to be a growing demand for the Roman ‘means of payment’. The Roman authorities could respond to this demand, by creating new money and spending it into circulation.

After 200 years, however, the mobilization of taxes was not enough to finance the massive military expenditures being incurred due to the Roman Empire’s expansion. As Ku (2015) suggests:

“The Roman Republic had too much political pain to collect enough tax to pay for the expensive Punic Wars, and the law-based self-restraint on currency issuance gave way to a need-based appeal to finance war.”

The Roman authorities did not create new money that responded to growing demand for the currency (due to economic expansion), nor was new money being created according to the system’s institutional checks and balances. Consequently, the Romans soon lost their ability to control their currency:

“…the start of the massive 2nd Punic War against Carthage led by Hannibal, Rome started producing aes grave that weighed half of the original. By the middle of the 2nd Punic War, aes grave weighing a tenth of the original were produced. While an aes grave always carried the same denomination of one Aes regardless of weight, it was indirect indication that Rome was financing the war with massive issuance of new currencies that outran its ability to produce bronze. The Roman Republic was starting to lose control of its currency…More issuances of currency made more wars seem financeable, and more wars made more issuances seem necessary.”

The Roman case study is an excellent one as it illustrates both the pros and cons of allowing the state to create money:

Money creation by the state worked well when:

1. It was done with restraint and stimulated the economy;

2. When there was an appropriate system of checks and balances on the amount of money being created; and

3. When there was growing demand for a means of payment.

Conversely, when the system of checks and balances was swept aside, and the purpose of money creation was to finance war (due to a declining tax base relative to military expenditure) control of the currency was lost, and its value fell.

Ancient China

The history of money creation in China goes back nearly 3000 to 4500 years. The cowry shell is believed to be the earliest form of Chinese currency, used throughout the Neolithic period. Yet different states within China used different forms of coins made up from a variety of different types of non-precious metals.

Around 220BC, Emperor Qin Shi Huang managed to conquer the rest of China and in doing so unified China for the first time in history. Accordingly, to standardize the monetary system, he abolished all other forms of currency and introduced a two-tier currency system (with a “higher” form of currency made of gold and a “lower” form of currency made of bronze). Most importantly, Emperor Qi Shi Huang had successfully introduced a system where money and purchasing power was created by government fiat throughout China.

This fiat money system changed around the 11th century AD, as paper currency was introduced alongside coins. Adair Turner (2015) notes:

“Marco Polo recorded with surprise and admiration the fact that Kublai Khan was able to create sovereign spending power with paper money” (p. 112).

Indeed, when arriving in China, Marco Polo wrote that he was astonished after witnessing Kublai Khan’s monetary system:

“In this city of Cambalu [another spelling for Khanbaliq] is the mint of the grand Khan, who may truly be said to possess the secret of the alchemists, as he has the art of producing money…this paper currency is circulated in every part of the grand khan’s dominions; nor dares any person, at the peril of his life, refuse to accept it in payment. All his subjects receive it without hesitation, because wherever their business may call them, they can dispose of it again in the purchase of merchandise they may have occasion for; such as pearls, jewels, gold, or silver. With it, in short, every article may be procured… All his majesty’s armies are paid with this currency, which is to them of the same value as if it were gold or silver. Upon these grounds, it may certainly be affirmed that the grand khan has a more extensive command of treasure than any other sovereign in the universe.”

The Chinese case study shows how Public Money Creation helped to standardize the monetary system.

In standardizing the currency throughout China, the sovereign will have facilitated trade amongst different states, by making it easier for transactions to be conducted and for payments to be settled. It also shows that the government managed to successfully create paper money that was accepted throughout China and that was treated with the same value as silver and gold. This is because money does not have to possess value of its own, as long as the state is able to require its acceptance. Objectors to fiat money dismiss the Chinese case on the grounds that “In fifty years from 1260 to 1309 Yuan’s paper money was depreciated by 1000 percent”* but when we look at the Maths behind this, we can see that this is equivalent to an inflation rate of 4.7% a year. This may be considered high by recent Western experience, but let’s remember that before the 1920s Britain generally averaged a 4% inflation rate and a 4-5% rate of inflation is generally considered acceptable for developing economies. (*http://www.garynorth.com/public/6915.cfm)