In the 17th century, the Venetian Republic was still a major trading and maritime power, having become the world’s first true international financial center 300 years earlier. How the city responded to a bubonic plague outbreak in 1630 bears uncanny parallels to the Covid-19 pandemic, and may offer some cautionary tales for policymakers the next time they are called upon to adopt an unconventional approach long considered unconventional was taboo.
Helicopter money in its purest form, as conceived by economist Milton Friedman, involves central banks printing money and then distributing it directly to citizens. Economies from the US to Hong Kong and Singapore have been disbursing funds to their populations during the pandemic as lockdowns halted economic activity and strained household and business finances. While these have sometimes been cited as examples of “helicopter money,” none of them met the strict definition of this approach, which remains controversial because it draws central banks into the realm of fiscal policy, making them more vulnerable to political pressure and undermining their tradition of independence . Venetian experience suggests that prudence was deserved.
Faced with the devastation caused by the plague, the city took advantage of what academics Charles Goodhart, Donato Masciandaro, and Stefano Ugolini call “hard helicopter money,” resorting to tax monetization through its Giro bank. The state lender’s balance sheet rose to 2.67 million ducats by June 1630 from less than 1 million ducats in the previous decade, as the government paid its creditors merely by crediting their checking accounts, they write in “Pandemic Recession And Helicopter Money: Venice, 1629-1631.”
The consequences were serious. Monetary expansion led to a depreciation of bank money, prompting authorities to suspend convertibility of deposits into coins. It caused the collapse of another public bank, Rialto, which ceased operations after deposits drained as it was crowded out by Giro Bank’s growth. And it led to an unprecedented rise in prices. Ultimately, the government was forced to back down on its helicopter hard money strategy: it bailed out Giro Bank, reducing its balance sheet and then the money supply. This enabled bank money to appreciate and pushed up the Venetian Republic’s public debt.
The political background is revealing. The authors write that wealth was extremely polarized in Venice at the time. Though ruled by an oligarchy, public institutions reflected popular expectations when disasters struck. People kept a close eye on government activities and were ready to cause major unrest if they believed the authorities were not doing all they could and should to ensure food availability. The government had much to fear and undertook its massive fiscal and monetary expansion to avoid the threat of unrest.
At the same time, the city took strict containment measures. While they saved lives, they crippled the economy (sound familiar?). Shops were closed, auctions and weekly markets were banned. The majority of Venetians became disabled during pandemics, making them dependent on public handouts or illegal activities. Unemployment alone “incomparably more people died than from typhoid or other contagious diseases,” the study quotes a textile retailer who advocates lifting the quarantine. It’s an unmistakable echo of the lockdown compromise debate that has sparked frustration and protests from Michigan to Shanghai during the Covid pandemic.
There are differences beyond the obvious implied by a gap of almost 400 years. Venice lost 30% of its population to the plague in three years, so the effects have been far more devastating than Covid. Still, the city’s financial missteps compounded the damage. The episode was a turning point for Venice, setting it on a path of long-term decline, culminating in the fall of the Republic at the hands of Napoleon in 1797.
“The history of the Venetian response to the famine and pandemic of 1629-1631 reflects many aspects of the Covid-19 crisis,” the authors conclude. “For one thing, it proves that today’s extraordinary fiscal expansion to deal with a pandemic was far from unprecedented. Furthermore, this suggests that the refusal of today’s ‘central bankers’ to embark on a ‘hard helicopter money’ experiment may have been a good idea after all.”
It’s tempting to wonder how much worse inflation could be now if post-Covid policymakers had gone all out and introduced ‘hard’ helicopter money. Goodhart, a former Bank of England policymaker who now works at the London School of Economics, doubts that would have made much of a difference, given that what mattered was the increase in broad money supply, however achieved became. What it would have done, he said via email, was put the condition and status of central banks in a far worse state, making it harder to contain inflation, which they are now trying to reduce.
Furthermore, the fact that the world almost touches Friedman’s concept is a reminder of what can happen when you don’t expect the unexpected. Interest in helicopter money has been fueled by more than a decade of subpar growth and interest rates stuck at zero floors even in the face of widespread quantitative easing. When an unconventional monetary tool failed, the allure of an even more radical solution grew. However, after it seemed like we were stuck in an endless rut not too long ago, the world was about to change in unpredictable ways. How many predicted Russia’s invasion of Ukraine and pandemic-related supply shortages, both of which have helped turn our inflation assumptions on their head? There is a lesson to remember: things happen.
More from the Bloomberg Opinion:
• Central bankers are captivated by old tales: Clive Crook
• Money can’t ease Hong Kong’s fears of lockdown: Matthew Brooker
• The Stimulus Brigade’s Final Assault?: Marcus Ashworth
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Matthew Brooker is a Bloomberg Opinion columnist covering finance and politics in Asia. A former editor and bureau chief of Bloomberg News and deputy business editor of the South China Morning Post, he is a CFA charterholder.
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