WASHINGTON – You’ve heard people compare the financial crisis of 2008 and its still lingering aftermath to the Great Depression of the 1930s. Earlier this month, I suggested the Panic of 1893 as another point of comparison.
Now here’s an additional global financial crisis to consider, from Oxford University historian Peter Frankopan’s just-published “The Silk Roads: A New History of the World.”
The crisis was caused by a series of factors that resonate 600 years later: over-saturated markets, currency devaluations and a lopsided balance of payments that went awry. Even with the growing demand for silks and other luxury products, there was only so much that could be absorbed.
It was not that appetites were sated or that tastes had changed, it was that the exchange mechanism went wrong: Europe in particular had little to give in return for the fabrics, ceramics and spices that were so highly prized. With China effectively producing more than it could sell abroad, there were predictable consequences when the ability to keep buying goods dried up.
Frankopan is writing about the 15th-century dislocation that is now most often referred to as the “great bullion famine,” which makes it sound like they ran out of soup. It has also been called “the economic depression of the Renaissance” and “the Great Depression of the late Middle Ages.”
In any case, it was bad. In Frankopan’s telling, money ran short, economies shrank, some Europeans became convinced that the world was coming to an end. And in the world’s largest economy, a bubble burst:
In China, state officials were not well paid, which led to regular corruption scandals and extensive inefficiencies. Worse, even when correctly and fairly assessed, taxpayers could not keep up with the irrational exuberance of a government that was keen to spend on grandiose schemes on the assumption that revenues would only ever rise. They didn’t.
Population decline due to epidemics, famines and wars was one probable cause of the crisis. Global cooling from volcanic activity may have played a role, too. But it’s the bullion famine — a lack of gold and silver that meant money supply couldn’t keep up with demand — that seems to have gotten the most scholarly attention (from doubters as well as proponents).
It’s also the element of the 15th-century crisis that seems most relevant today. Gold and silver are no longer the basis of the money supply, and central banks can in theory create all the money they want. But somehow or other we’ve ended up in a situation in which countries are resorting to extreme measures to get people to spend money, and global trade is sputtering as more stuff is produced than people are willing or able to buy. It feels a little like a bullion famine, even if it can’t be. Can it?
Population growth, an improving climate and relatively peaceful conditions enabled Europe to start growing out of its depression in the latter half of the 1400s. Then the discovery of the Americas — which, among other things, brought massive new silver supplies that put a definitive end to the bullion famine — led to a new era of prosperity and ambition for Western Europe. China, meanwhile, turned inward and began a long era of economic stagnation.
What are we to make of all this? Not too much — we’re talking about the 15th century after all. But it is fascinating to learn that trade imbalances between China and the West have brought trouble before, and to be reminded that money-supply issues are such an enduring element of economic fluctuations.
As Carmen Reinhart and Kenneth Rogoff made clear in their 2009 best-seller “This Time Is Different: Eight Centuries of Financial Folly,” the world has been going through these crises at least since the Middle Ages. They usually take a long time to recover from, and sometimes they presage big shifts in global economic power. Wonder what (if anything) people will be writing about today’s troubles 600 years from now.
Justin Fox is a Bloomberg View columnist who writes about business and a commentator. Previously, he was the editorial director of the Harvard Business Review. He is the author of the book “The Myth of the Rational Market.”