Sunday, May 1, 2016

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.

3 comments:

  1. Modern Monetary policy in the ancient world started with the Romans. Coinage was consisted of three types of coins: gold coins generally used in imperial transaction, silver coins in trade transactions and bronze coins the most abundant for day to day purchases by ordinary people. The various coins could be reciprocally exchanged at specific values. Coinage was struck at various sites in Europe, north Africa and the middle east. All coins irrespective of their provenance were exchanged for goods across the empire. The system guaranteed availability of money according to specific use and to all social classes allowing social mobility. The monetary system and social system collapsed in the early fourth century when a gold standard was adopted, making silver and bronze coinage literally worthless.

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  2. and so did "representative" senatorial government, massive sporting spectacles and organized religion.... and it's been mostly downhill ever since...

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  3. Trying to interpret history with modern west capitalistic institutions isn't the optimal way.

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