Bankers' Bonuses, Roman Style
Since antiquity, moneymen have been the target of vitriol.
Today’s bankers are widely reviled. Bonus season – usually in February – gives rise to headlines such as: Fat cats getting fatter? Bankers’ bonus culture lives on as millionaires’ club tops 2,700 and It’s a very Happy New year for Goldman fat cats! The financial crisis has only increased the opprobrium.
It was ever thus: since antiquity moneymen have been the target of vitriol. Cato the Elder, writing in the second century BC, likened the act of lending money to that of murder and many literary works of the period portrayed the argentarii (bankers) as immoral.
Yet the argentarii were a vital part of the Roman economy – just as they are today. Recent research reveals that the failure of Rome’s leaders to support the bankers had a devastating effect upon the economy just as it was experiencing a period of unprecedented growth.
Dr Philip Kay of Wolfson College Oxford has produced the most detailed analysis of Rome’s economic development in the late Republic period and this week speaks at the Legatum Institute about his work. Following the Second Punic War (218 – 201 BC) Rome experienced a period of exceptional economic growth. Military success saw the Romans collect indemnities from the Syrians, Macedonians, Carthaginians and Seleucids amongst others. In the 50 years after the war 1,050 tonnes of silver arrived in the city. The result was an expansion of the money supply; partly in the form of an increase of Denarii in circulation, from 68 million in 150 BC to 240 million in 50 BC, but also in the form of bank deposits, as banks and wealthy individuals extended credit to those who wanted it. This fuelled investment in urban infrastructure and agriculture, increasing demand and stimulating Mediterranean trade, which is estimated to have increased by over 500% between 249 and 50 BC.
Dr Kay estimates that the result was real GDP per capita growth of around 0.54% per annum between 150 and 50 BC, meaning that real GDP per capita grew by 72% taking the century as a whole. Such gains, like with today’s economic growth, were unevenly spread. The wealth of the elite grew by around 500%, while non-elite wealth grew by only 77%. However in 88 BC Mithradates VI invaded Asia Minor and seized many Roman investments in the region, causing shockwaves to ripple through the Roman economy.
The result is reminiscent of the global economy in the period between 2001 and 2007, where a period of sustained economic growth was followed by a credit crunch and recession. Kay himself draws this parallel. In recounting a passage of Cicero’s that outlines how the Roman ‘credit and this system of monies… is linked with, those Asian monies; the loss of one inevitably undermines the other and causes its collapse’ Kay suggests substituting ‘US sub-prime’ for ‘the Asian monies’ and ‘UK banking system’ for ‘the system of monies’.
Yet there is one important difference between the two episodes. Unlike their ancient counterparts policy-makers in 2008 (by and large) responded effectively to the crisis. Central banks cut interest rates, governments enacted fiscal stimuli and organisations such as the WTO and IMF helped ensure that international trade continued. As Professor Daniel Drezner of Tufts University puts it in his recent book: The System Worked. The support of banks and the financial system was vital in this. While the profits of the financial sector took a hit, and pay and employment decreased, many top executives continued to be paid six figure bonuses. The alternative, as Rome’s experience will show, could have been much worse.
In the same year that the crisis began the consuls Sulla and Pompeius Rufus passed a law that allowed partial repayment of debts and capped interest rates. Later Sulla confiscated the properties of prominent Roman citizens, an act which drove down property values, further undermining the balance sheets of the battered banks. There were similar actions taken in response to later crises which meant that credit remained tight for the remainder of the first century. Politically, the populist response of the Republican elite, in further damaging the Roman economy, hastened the demise of the Republic. Today’s leaders would be wise to heed the dangers of pandering to populist sentiment.
In AD 33 Tiberius took one of the few prudent steps to address an economic crisis when he stimulated lending through interest free loans, something that Kay describes as ‘functionally the same as what we would call quantitative easing’. Ironically today’s quantitative easing is held responsible for inflating asset values and generating wealth for financiers and the rich alike.
The Roman Republic holds a salutary lesson: during a crisis, support for the financial system is often necessary to stave off a full-blown depression. It is likely that during the next crisis we’ll find ourselves supporting the modern-day argentarii again.
Stephen Clarke is a Research Analyst at the Legatum Institute, London.
The Legatum Institute is currently running the History of Capitalism Programme, a series of lectures which explores the origins and development of a movement of thought and endeavour which has transformed the human condition.