We don’t talk much about helicopter money anymore. After a debate that raged through the early days of the pandemic, it’s all but fallen off the map as a topic. That’s hardly surprising, given how radically economic conditions have changed. Rather than worrying about how to shore up a collapsing economy, the issue of the hour is how to tame the fastest inflation in decades. But perhaps we shouldn’t consign the globe’s dalliance with helicopter money to the annals of history just yet. Not without considering Venice first.
In the 17th century, the Venetian republic was still a major trade and maritime power, having become the world’s first true international financial center 300 years earlier. How the city responded to an outbreak of bubonic plague in 1630 holds eerie parallels with the COVID-19 pandemic, and potentially some cautionary lessons for monetary policy makers, the next time they are called on to embrace an unconventional approach that had long been regarded as taboo.
Helicopter money in its purest form, as conceived by economist Milton Friedman, entails central banks printing money and then distributing it directly to citizens. Economies from the US to Hong Kong and Singapore have disbursed funds to their populations during the pandemic, as lockdowns stalled economic activity and strained the finances of households and businesses. While these have sometimes been reported as examples of “helicopter money,” none of them met the strict definition of that approach, which remains controversial because it draws central banks into the realm of fiscal policy, makes them more susceptible to political pressure and erodes their tradition of independence. The Venetian experience suggests that circumspection was merited.
Faced with the devastation of the plague, the city used what academics Charles Goodhart, Donato Masciandaro, and Stefano Ugolini refer to as “hard helicopter money,” resorting to fiscal monetization through its Giro bank. The state lender’s balance sheet rose to 2.67 million ducats by June 1630 from less than 1 million ducats in the previous decade, as the government paid its creditors by merely crediting their current accounts, they write in Pandemic Recession And Helicopter Money: Venice, 1629-1631.
The consequences were severe. Monetary expansion caused a depreciation in the value of bank money, leading authorities to suspend convertibility of deposits into coins. It caused the failure of another public bank, Rialto, which stopped operating after deposits drained away when it was crowded out by Giro bank’s growth. And it led to an unprecedented rise in prices. Ultimately, the government was forced to backtrack on its hard helicopter money strategy: It undertook a bailout of Giro bank, reducing its balance sheet and then the money supply. This allowed for a reappreciation of bank money and drove up the Venetian republic’s public debt.
The political backdrop is instructive. Wealth was extremely polarized in Venice at the time, the authors write. Though ruled by an oligarchy, public institutions reflected the expectations of the population when calamities occurred. People were watchful of government activity and ready to cause major disturbances if they became convinced authorities weren’t doing all they could and should to ensure the availability of food. The government had much to fear, and undertook its massive fiscal and monetary expansion to avoid the threat of riots.
At the same time, the city was employing stringent containment measures. While these saved lives, they paralyzed the economy (sound familiar?). Shops were closed, and auctions and weekly markets prohibited. The majority of Venetians became unable to work during pandemics, leaving them dependent on public handouts or illicit activity. An “incomparable greater number of people has died purely as a result of unemployment than of typhus or any other contagious disease,” the study cites one textile merchant as saying in pleading for the quarantine to be lifted. That’s an unmistakable echo of the debate over lockdown tradeoffs that has caused frustration and protests from Michigan to Shanghai during the COVID pandemic.
There are differences, beyond the obvious implied by a gap of almost 400 years. Venice lost 30% of its population in three years to the plague, so the impact was far more destructive than COVID. Still, the city’s monetary missteps compounded the damage. The episode was a turning point for Venice, setting it on a path of long-term decline that culminated in the republic’s demise at the hands of Napoleon in 1797.
“The history of the Venetian reaction to the 1629-1631 famine and pandemic echoes many aspects of the COVID-19 crisis,” the authors conclude. “For one thing, it proves that nowadays’ extraordinary fiscal expansion to cope with a pandemic were far from unprecedented. Moreover, it suggests that nowadays’ central bankers’ refusal to embark into some ‘hard helicopter money’ experiment may have been a good idea after all.”
It’s tempting to ask how much worse inflation might be now if policy makers had gone all-in and adopted “hard” helicopter money in the wake of COVID. Goodhart, a former Bank of England policy maker who’s now with the London School of Economics, doubts that it would have made a big difference, given that what mattered was the rise in broad money, however achieved. What it would have done, he said by e-mail, is put the condition and status of central banks in a far worse state, making it harder to restrain the inflation that they are now trying to reduce.
Beyond this, the world’s near-brush with Friedman’s concept is a reminder of how failing to expect the unexpected can slip you up. Interest in helicopter money was fed by more than a decade of subpar growth and interest rates that remained stuck at the zero lower bound, even in the face of vast quantitative easing. When one unconventional monetary tool didn’t work, the appeal of an even more radical solution grew. Yet having seemed not long ago as though we were stuck in an interminable rut, the world was about to change in unpredictable ways. How many foresaw Russia’s invasion of Ukraine and pandemic-related supply bottlenecks, which both helped to upend our inflation assumptions? There’s a lesson to remember: Stuff happens.