It’s always fun to look back at history and wonder to yourself: What were they thinking? This is even more true looking back at economic history. It was only about 100 years ago that Keynes proposed the importance of aggregate demand and the role of fiscal and monetary policy. In fact, economics only really came into its own after Adam Smith released ‘The Wealth of Nations’ in 1776. So it’s no wonder that when we look back before this, we see so many catastrophic economic crises that occurred simply because people didn’t know any better. Perhaps the first of these occurred 1990 years ago, during the reign of Tiberius, the second Roman Emperor, and it was so catastrophic that its memory lives on today.
When looking this far back, a bit of historical background is essential. In the 1st century BCE, Rome had been torn apart by a series of civil wars. On January 10, 49 BCE, Julius Caesar crossed the Rubicon with his armies and marched on Rome, thus beginning a civil war against Pompey the Great which would last until Caesar’s victory in 48 BCE. During this war, Caesar passed a law very important to our story. It was a usury law, legislating that lenders had to own a certain amount of land in the Italian peninsula, which was implemented to prevent capital flight from Italy during the war. Following Caesar’s assassination and the civil war that followed, his heir, Octavian, became the first Roman Emperor, Augustus, in 27 BCE and Rome endured years of peace and prosperity. Augustus’ reign was characterised by frivolous government spending, with land all throughout Italy purchased for discharged veterans, all the roads of Rome repaired, and the building of temples, aqueducts, and public baths. This drove Roman interest rates down from an estimated 12% to only 4%, spurring on the hedonism of Rome’s citizens. However, the good times wouldn’t last forever.
In the final years of Augustus’ reign, his spending measures at home slowed down considerably. As Rome’s empire expanded, significant amounts of money were spent on the armies in Gaul, Spain, Asia and Egypt. Even in the secured frontier provinces, significant public investments were required to build cities in the Roman image. Although such investments were expected to eventually bring returns back to Rome, the mass outflow of Roman coinage created a sharp contraction in monetary supply. Additionally, Augustan prosperity meant there was significant private expenditure on imported luxuries, particularly by the Roman nobility who had no interest in investing in industry and instead consolidated their land holdings. These issues were exacerbated by the policies of Augustus’ successor, Tiberius, upon his ascension in 14 BCE. He continued to wind back Augustus’ spending, including on warfare, controversially withdrawing the Roman armies from across the Rhine and establishing a new frontier there. Tiberius ran enormous budget surpluses throughout his reign, inheriting 100 million sesterces from Augustus, and leaving his successor Caligula with 2.7 billion. This only further restricted the money supply, as taxes and tribute payments were hoarded in the Emperor’s Treasury, along with private property which he confiscated in the paranoid treason trials characteristic of his later reign. The Roman economy suffered from this cash squeeze for years, but it didn’t become a full-blown crisis until the reinforcement of a very old law.
For reasons historians have struggled to pin down, Julius Caesar’s laws on usury, disregarded for more than 80 years, began to be reinforced again in 33 AD. The courts were shocked to see just how many lenders had not adequately backed their loans with property holdings, and the case was brought to Tiberius and the Senate. Upon realizing that all 600 Senators were in violation of the law, Tiberius decreed that lenders had 18 months to ensure that two-thirds of their capital was invested in Italian land. This was a massive shock to the Roman economy and saw many lenders suddenly recall their loans due to their insufficient property holdings. In response, debtors were forced to sell off their assets, particularly property, in large fire sales which caused land prices to plummet. Noticing this, creditors ceased recalling their loans, as they saw a lucrative opportunity to wait and buy up land at even cheaper prices. Then a series of unforeseen crises struck. Following the sinking of three merchant ships owned by the important Egyptian financial institution Seuthe & Son., many Roman banks exposed to Seuthe & Son collapsed when it called in its loans, and a large bank run followed which brought even more down. This led to a rapid increase in interest rates and a credit crunch. Thus, Rome was in full-blown financial crisis. Land prices and wealth were at a catastrophic low, credit was nearly impossible to obtain, and many lenders still required property or they faced prosecution at the end of the 18-month grace period.
The notoriously frugal Tiberius was eventually forced to step in. Having put together a commission of five senators acting on behalf of the Treasury, Tiberius decided to undertake what is possibly the world’s first example of quantitative easing. He lent out 100 million sesterces to distressed landowners in the form of 3-year, zero-interest loans. These were distributed to reliable banks to lend on behalf of the Treasury, and collateral on the loans was double the real value of property. This helped to ensure that debtors stopped selling land at low prices. Tiberius’ solution led to an end of the financial crisis, and the Roman economy remained stable up until his death four years later in 37 AD.
Even at the time, the events of 33 AD were a matter of great public importance. The fact that so much information about the crisis still exists today, with records from the three major Roman historians of the time: Tacitus, Suetonius and Cassius Dio, highlights not only how catastrophic the crisis was, but how new and unexpected it was. The crisis has also been the subject of contemporary scholarship, with comparisons made between it and the 2007-08 Global Financial Crisis. Rome may not have had a sub-prime mortgage market or complex financial derivatives, but the story of a credit crunch, a collapsed property market, the breakdown of major financial institutions and a subsequent government bailout seems all too familiar to us now. So yes, we can look back and wonder at how Tiberius thought his frugality, or the reintroduction of Caesar’s usury laws wouldn’t cause an economic crisis, but looking back at crises within our lifetimes, can’t we ask similar questions?