Sunday, 13 July 2014

History and Economics

The first recorded national inflation occurred in Nero's Rome, when coins were made of only gold, silver, and copper. The government ran up huge debt trying to fund Nero’s spending and ran out of money. Nero simply made silver coins 20% smaller in order to ‘create’ new money, but merchants realised this and raised their prices. So Nero mixed cheaper metals into formerly pure coins, causing prices to soar again.

Henry VIII repeated this mistake with debasement of the coinage in the 1540s in order to finance his wars with France and Scotland. As coins lost their value, merchants began to trust the currency less, raising their prices, leading to inflation and causing the average income fall in value by 50% in just four years.

In the early 1930s Germany fell into the same trap. The Great Depression and restitution payments to France and England from WWI meant the government was out of money. The only way it could pay its bills was to print more, however printing money just made the the German mark worth less, forcing the government to print more and more. Eventually it took a basket full of marks to buy just a loaf of bread. With both depression and inflation running wild savings became worthless over night and unemployment soared. Even the richest industrialists began to suffer.

President Herbet Hoover, seeing these mistakes, decided that when the stock market crashed in 1929, it was not the government's job to restore the economy. His government did little and the result of this was The Great Depression. Millions of unemployed and homeless gathered in shanty towns made of cardboard and tents, and named their settlements "Hoovervilles". This relates to my last blog post; did Hoover learn the wrong lesson from history? Or, was he simply using the mistakes of previous governments in order to excuse his governments' inaction?

I recently read Dead Aid by Dambisa Moyo, which I loved. Dead Aid is a political/economical book on why the current system of aid to Africa is not working, and what can be done to fix this. I may do another post in the future on what Moyo actually argued, but I first want to relate some of Moyo’s points to their historical context. 

In the Roman Empire the middle class began to diminish due to slaves doing their jobs for free, putting them out of work. At the same time, taxes paid by businessmen and farmers were constantly rising, putting more and more of the middle class out of work and into poverty. By the end of the second century thousands of farms or homes were being foreclosed on every year. These farms and businesses were resold to the rich, who also controlled the Roman Senate and paid few taxes. The rich got richer and the middle class got poorer. Wealthy Romans also used captured slaves who carried out cheap work that the middle class used to do, creating massive unemployment. But with no middle class the Roman empire inevitably declined first economically and eventually militarily, falling to the Barbarians.

One of Moyo’s arguments was that the lack of a middle class in many African states is hindering growth, with no one interested in creating transparent financial systems and upholding law and order. Corruption and a lack of capital markets drives away the middle class as bureaucracy and red tape make entrepreneurship difficult and setting up a businesses expensive. The middle class also do not save or borrow as they do not trust banks, meaning there is less investment in the economy and development falters. Corrupt governments, propped up by aid, get richer, the poor get poorer, and the middle class move abroad, creating a brain drain, and, despite the millions of dollars it receives in aid, keeping Africa poor. 

This shows that whilst situation, technology and circumstance all change, ultimately many of the issues we face today, or have faced in the last several centuries, still relate back to issues humans faced hundreds or thousands of years ago. This means that not only can we learn lessons from the last few decades, but reaching right back for thousands of years.