THE COURAGE TO ACT: A MEMOIR OF A CRISIS AND ITS AFTERMATH

Comentario al libro

“THE COURAGE TO ACT: A MEMOIR OF A CRISIS AND ITS AFTERMATH”

de Ben S. Bernanke

"Desafiamos los augurios. Hay providencia especial en la caída de un gorrión. Si ha de ser ahora, no será más tarde; si no ha de ser más tarde, será ahora; si no ha de ser ahora, ocurrirá de todos modos. Lo principal es estar preparado." – (Hamlet, William Shakespeare)

The Courage to Act es el relato autobiográfico de Ben Bernanke y de su rol como presidente de la Reserva Federal de Estados Unidos durante la Gran Recesión (2008-09), la crisis económica más profunda sufrida por ese país desde la Gran Depresión (1929-33). Aunque las crisis financieras son impredecibles, estas suceden tarde o temprano. Bernanke confiesa que fue totalmente sorprendido por la crisis e incluso en 2006 no vislumbró el caos que se aproximaba. Sin embargo, Bernanke estaba singularmente preparado para responder al colapso económico de 2008, dadas sus reflexiones sobre la Gran Depresión de 1929 y las crisis más recientes de Japón y Suecia.

Este es el inicio de mi artículo acerca de la autobiografía de Ben Bernanke. ¿Quién diría que la economía puede ser tan dramática e poética como Hamlet? Pueden leer el texto completo en este link:

https://www.researchgate.net/publication/307561053_THE_COURAGE_TO_ACT_A_MEMOIR_OF_A_CRISIS_AND_ITS_AFTERMATH 

O en este link:

http://www.bcentral.cl/es/faces/bcentral/publicaciones/fichapublicacion?id=BCCH_PUBLICACI_167539_ES&_afrLoop=456179401436777&_afrWindowMode=0&_afrWindowId=1alm0xeaal_1#!%40%40%3F_afrWindowId%3D1alm0xeaal_1%26_afrLoop%3D456179401436777%26id%3DBCCH_PUBLICACI_167539_ES%26_afrWindowMode%3D0%26_adf.ctrl-state%3D1alm0xeaal_161

The Keynesian and Monetarist Policy of Alexander the Great

Archaeological evidence shows that interest rates for business loans hovered around 30% in the ancient world. Gold and silver currency were hard to find and many merchants had to trade goods for other goods. Just think how hard the life of an ancient merchant was without good and widely accepted coins. Instead of using money to pay for his items, the merchant would have to carry goods (say, cereal) and then trade such goods for his new merchandise (say, pottery) somewhere else. Obviously, this involved having to carry heavy goods in horse-pulled wagons both ways. This changed after Alexander’s conquests.

Perhaps without intention, Alexander the Great was a revolutionary in economic policy. After capturing an enormous quantity of gold and silver talents from the Persian Empire, Alexander the Great sponsored temple reconstruction, road building, monuments and art. This was a Keynesian policy in the style of an ancient conqueror! However, Alexander also implemented a monetarist policy, issuing huge amounts of gold and silver coins, which lowered interest rates from 30% to 6%. This differed from the Persian policies regarding currency, since they preferred to accumulated gold and silver in huge reserves in their treasuries. Money went from treasury keepers to the business men. City-states however had to borrow at slightly higher interest rates, perhaps because lenders were afraid that city governors (which at the time could control small armies) would refuse to pay unless by force.  Entrepreneurs in trade, art and construction projects benefited from the new coins issued by the Hellenes all over the Western Asia and the Middle East. Artists and builders could get funding for their projects. Merchants found currency easily available to buy their merchandise in other countries, without pulling heavy wagons with goods on their way, which saved their troubles for at least half of the path. A new age of Hellenistic art and economic prosperity started.

Of course, anti-cyclical policy or concerns about unemployment or potential GDP were far from Alexander's concerns. His reign coincided with a big increase in expenditures, because he had a concern for grandiose projects. The increase in money issue was certainly only driven for two reasons: one, to finance his expenditures in military (Alexander had to repay a big debt inherited from his father Phillip II's Persian expedition preparations) and big monuments, and second, because new coins were a good way to celebrate the glorious events of a new reign. Still, in ancient times just as now, monetary expansion has an inflation cost. Historical evidence shows that in cities such as Tyre, Gaza and Babylon, there was an increase in prices, perhaps by twice as much, and the economic boom ended in a recession. However, the economy and trade did boom back again after the Diadochi conflicts subsided into a relatively more peaceful era.

Inflation and Unpaid Wages destroyed the Roman Empire

Historians still debate the decline and end of the Roman Empire, a subject which inspired Edward Gibbon’s masterpiece, perhaps the most widely read history books ever. This blog will just add my personal views on a topic that has been covered many times by other authors. Many hypothesis have been proposed for the Roman decline. Some point to Christianity as a source of imperial Rome's weakness. However, the Eastern Empire was also Christian and remained a strong power until the 12th century at least. Others point out that too much lead in the water supplies was slowly poisoning the Roman population. However, it feels to me that the barbarians that penetrated the Roman empire, such as the Vandals and Visigoths, were also getting water from the same sources as the Romans, therefore I feel this to be a weak explanation.

The Roman Empire started a slow decline after the Antonine plague, which some estimate killed five million people or more than 10% of the empire’s population. The plague ended the period of greatest economic prosperity of the Roman Empire. It happened just at the climax of the greatest political and military influence of the Empire, since their major rivals, the Parthians, had been repeatedly defeated by the Romans. However, a plague does not always imply the decline of a civilization. In the late middle ages the Black Plague killed a substantial part of the European population and some economic historians say that this disease increased the wages of workers (since now there were fewer people than land) and this increase in wages may have given impulse to new industries and the long term development of Europe.

The reason why the Roman Empire may have declined and eventually disintegrated is therefore probably not due to a plague nor due to military defeats. Urban populations after a plague can employ new workers at higher wages and find new arts and industries in order to recover their wealth and splendor. Also, the Roman Empire had suffered defeats far worse than the famous disaster of Adrianopole in the late 4^th century. In particular, it is easy to argue that the military defeats against Hannibal during the Punic wars, the disasters against the Teutons around 105 BC, or the rebellion of the Italian provinces during the Social War of 88 BC, were far bigger than the battle of Adrianopole. The long lasting nature of the Romans was not that their armies were always invincible, but their ability to persuade their citizens to form a new army even after suffering major defeats. Presumably, persuading your citizens to join the military effort was easier in an oligarchy or autocracy that had some respect for citizen rights. However, after the 2^nd century the Romans became a military regime in which only the generals and their troops counted for something, a bit like the Soviet Union which had the largest army in the world and yet was unable to produce decent products such as toilet paper or bread. In such a military regime probably the citizens were afraid of their Roman oppressors as much as of their barbarian invaders. After a military defeat in the 4^th or 5^th century few Romans would cooperate with their generals and authorities, because Roman generals feared that their fellow citizens could be rivals in the competition for power and therefore even if the new generals were successful these could be murdered afterward when they were no longer convenient. This meant that the late Roman authorities would find few allies and would lose power easily after military defeats.

In my view perhaps a decisive moment in Roman history were the budget and monetary policies adopted by a very successful emperor Septimius Severus. Severus is one of the few generals in history who won large battles in three continents: Europe, Asia and Africa. Some historians believe that the battle of Lugdunum in which Severus confirmed his power was the bloodiest battle in all of roman history. Severus then enlarged the army in order to make further wars in Asia, Africa and Britain. He also increased the wage of each soldier by 30% in order to guarantee their loyalty. Above I show a picture of me and my twin brother – I am the one with longer hair – on top of the Roman wall in the city of York, England, which was where Severus died in sickness while planning to conquer Scotland. Below I show a picture of the roman theater in the African home town of Severus, Leptis Magna.

In order to pay for this large army expenses, Severus debased the coins and started an inflationary period from which Rome never recovered. As economists know, debasing the currency and creating rampant inflation is the worst possible way for a government to make revenues. It is much better to raise taxes, since the more inflation you make to pay something then you need even more inflation in the future to pay for the same things. The inflation process can go out of control and the government is unable to use money anymore. Also, ordinary business men and people stop using money and lose their confidence in the government. Inflation was already understood as a bad decision even in ancient times. Severus only adopted this bad measure because he came to power as a military dictator and only valued his soldiers. In fact Severus famous last words to his sons in York were: "Be harmonious, enrich the soldiers, and scorn all other men". Being unable to persuade the Senate to cooperate, Severus was limited to the worst policy option to finance his wars, which was inflation.

During the  3^rd and 4^th centuries it was clear that inflation was damaging the roman economy and their government system. Laws were passed authorizing generals to directly seize products and valuables for use of the army, therefore ordinary taxes paid in money fell out of use. Also, since workers and business men did not want to work in industries that were more easily “taxable” or “seized”, the Roman authorities ended up passing laws obliging people to stay in the area where they had been born and to work in the same occupation as their parents. Feudalism had started. The free and vibrant economy had been replaced by a planned and rigid system.

The Roman army was never actually defeated by the barbarian invaders. Even after losses such as Adrianopole the Roman leaders were able to persuade the “winners” to become cheap mercenaries for them. Therefore the barbarians could be described as a form of cheap labor in the official Roman army. Some historians, such as Peter Heather, even argue that these cheap Barbarian soldiers were actually what kept the Roman Empire running well and efficiently during the 5^th century. However, the Western Roman Empire was dependent on revenues from the large olive oil fields and other agricultural farms in modern day Tunisia. When a corrupt province governor and a group of barbarians, the Vandals, managed to occupy Tunisia, then Roman emperors lost a major source of revenue. After a few decades and an exhaustive war with the Huns, the Western Roman Empire was out of revenue and the Barbarian soldiers employed by the Emperor decided to rebel and simply run Italy as a kingdom for themselves. Therefore one could say that mismanagement in the form of inflation to pay for a military dictatorship and a lack of money to pay the wages of soldiers was the end of the Roman Empire. The Eastern Roman Empire was much more urbanized, had a stronger economy, and was therefore able to resist invasions from the Balkans, the Middle East and from Central Asia for several centuries more.

What did men first write about? Religion? Poetry? Or Finance?

If you answered Finance to the question then it was a smart choice! After my last post on the Financial Crisis of the Roman Empire in 33 AD many people asked me about when did such things as banks and financial companies start. Actually perhaps the weirdest thing is that Financial Services have been with us since the beginning of History or perhaps even since our earliest Proto-History. Historians often define the beginning of history with the invention of writing, since it allowed to register events and lives in a more accurate way. Objects such as weapons or tools exist for pre-historical times, but they only provide clues to how those men lived their lives and not about who they were, how they spoke, how they thought.

We tend to think the most ancient writings are religious works like the Bible (which started being written in the 7th century B.C.) or epic poems such as the Iliad and the Odyssey (which date from the 8th century B.C.). Some Hindu traditions claim their ancient writings like the Bhagavad Gita are more than 5000 years old, but modern historians think that the most ancient elements of the Gita come from the 8th or 9th centuries B.C. and that its final form was only completed from the 5th to 2nd centuries B.C. The Bible, the Iliad/Odyssey and the Bhagavad Gita do represent very old works which are still popular and widely read today. However, the most ancient writings are much less glamorous than stories of gods and heroes.

Writing appeared for the first time around 3100 BC in Ancient Sumeria or Mesopotamia, a region that is a part of modern Irak. As portrayed in the book by famous archaeologist Samuel Noah Kramer “History begins at Sumer”, the most ancient pieces of writing we have are about accounting and financial transactions, things such as how much was produced of each agricultural product, how much was stored and how much was traded. Ancient writers were basically doing basic accounting and registering loans such as “person A owes so much agricultural products to person B and this must be paid before date C”. The Sumerian stone tablet above from the Walters Art Museum registers a transfer of land and is one of the oldest examples of a phonetic writing system. Over time these writers added more signs to represent cities and gods in order to give a more sacred feeling to their financial contracts. In fact the first times religion is mentioned in writing it appears as sort of a financial penalty "the person who breaks the contract or does not pay will be cursed by god and demon so-so".

Perhaps some 400 or 500 years before writing appeared there was some form of proto-writing or pictograph drawings in Ancient Sumeria. And these pictograms were also about Accounting and Finance! Imagine the toy blocks that our children use before they know how to read. Some of these blocks may have the shapes of houses or of animals such as birds and cows, but children place them in a way that tells a story. In some sense the ancient business men had such a system before writing appeared! These men used small clay objects or tokens for counting agricultural and manufactured goods. But after a few centuries these ancient business men realized they could simply draw these images and clay objects were unnecessary, so pictographs replaced the clay tokens! Also, these business men found out it wasn’t necessary to draw an object or an animal such as a pig five times, since you could just draw one pig and then add five lines to mark it was the same object repeated as a certain numbers. And that was how math and arithmetic began. Writing appeared around 3100-3000 BC and it differs from pictographic proto-writing because it represents phonetic sounds and words instead of being a mere list of objects.

It is hard to know when Religion and Poetry started. Perhaps the oldest example of both comes from Sumerian mythology and the Epic of Gilgamesh, which is believed to have been written around 2000 BC. Above I show the image of a Babylonian table from 1800 BC with part of this epic, which is considered the oldest work of literature. It is the story of an abusive king Gilgamesh who overtaxes its people and molests the young women. Gilgamesh then finds a friend sent by the gods, Enkidu, and they live several adventures together. After Enkidu dies, Gilgamesh departs on a quest for Eternal Life. It is a fascinating story just like the Odyssey or the Genesis, therefore I will not spoil its reading with more details.

Well, I am an Economist and one who is interested in both financial topics and poetry. In fact many of the greatest poets and writers were merchants like Marco Polo or economists/accountants like Fernando Pessoa and Cavafy. Now how do I imagine that Religion and Poetry were born? I suppose one day an ancient Mesopotamian business man was tired of writing about properties, loans and finance. All these are valuable things, but ones that can be replaced. Then perhaps he thought about writing about things that cannot be counted and that are irreplaceable: the Sun, the Moon, the Constellations of Gods and Heroes. This bored business man then wrote of feelings such as love and friendship, which cannot be enforced by financial contracts. And that is how I imagine Religion and Poetry were born!