Venice has a very old Covid monetary lesson

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 monetisation 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 polarised in Venice at the time, the authors write. Though ruled by an oligarchy, public institutions reflected the expectations of the population when calamities occurred.

—Bloomberg