Lessons from History - Ten Economic Blunders from History

Ten Economic Blunders from History

Mises Daily: Wednesday, July 07, 2010 by John
S. Chamberlain

Take cover when you hear a political
leader talking about economic affairs. You can bet a bad decision is incoming.
Luckily for the leaders, their meddling usually has a slow, erosive effect on
the economy. Every so often, however, the great ones manage to land a real
whopper that takes them down along with their whole country. Here are ten
examples from history.

1.
Charge Too Much and You Die

In the year 301, the Roman emperor
Diocletian issued the Edictum De Pretiis Rerum Venalium, i.e., the Edict on
Prices of Foodstuffs, which rebalanced the coinage system and set maximums on
wages and the prices of many types of goods, especially food. The penalty for
selling above the stipulated prices was death. Copies of the edict were
inscribed on stone monuments all over the empire. Here's a tip for future
dictators: never inscribe your blunders on stone unless you want people to
laugh at you for the rest of eternity. The edict was a disaster. Sellers
withdrew their goods, unwilling to sell at the fixed prices or even risk being
falsely accused of selling beyond the maximum and thus be subject to execution.
Workers responded to the wage edicts by vanishing or sitting around doing
nothing. Eventually the edict was ignored and became a subject of derision and
mockery which permanently lowered the prestige and authority of the empire.

2.
Shearing the English Wolf

You know you are doing something
wrong when your enemies become folk heroes like Robin Hood. Common sense is to
tax the weak and give money to the strong, but after his failure in forestry
policy King John of England decided to try the reverse. He relieved the knights
of the realm from their military service requirements, but then ordered them to
pay instead a hefty "scutage" (shield) tax. Soon, there were 10,000
Robin Hoods trying to kill him and going about it in an organized fashion.
Signing the humiliating Magna Carta in 1215 bought him some time, but by the
next year he was living on the lam. After his folly-won treasure was washed
away in a mistimed river crossing, he went crazy and died soon after.

3.
Paper Money Is Amazing

The fifth Khan of Persia was named
"Gaykhatu," which means "amazing" in Mongolian. After
recklessly squandering the money left by his predecessors he was in no position
to cope with a massive rinderpest epidemic that began devastating his subjects'
livestock in 1294. Amazing came up with an amazing solution to his financial
problems: paper money. Invented by his boss, Kublai Khan, back in China the idea
of paper money was a godsend. He would print up certificates just like the
Chinese ones, decree death for anyone who refused them, and all his problems
would be solved. Amazing! Unfortunately for Amazing he did not fuss too much
with technical details like convertibility and capital controls, which Kublai
Khan had agonized over, and the result was the total failure of the project.
Economic chaos ensued. Amazing was deposed and put to death the next year.

4.
I'll Buy Every Sword You've Got

In the Muromachi period (1336 to
1573), Ming dynasty Mandarins in China adopted a policy of buying and importing
swords from the Japanese with the goal of depriving the troublesome
"barbarians" occupying those islands of their weapons. The gleeful
reaction of the Japanese was along the lines of Jay Leno's Doritos commercial:
buy all you like; we'll make more.

5.
No Smuggling Allowed

Price controls are stupid anytime,
but it takes true idiocy to apply them in the middle of a siege. In 1584 forces
controlled by Alexander Farnese, the duke of Parma, were besieging Holland's
grandest city, Antwerp, in the Dutch War of Independence. At first the siege
was ineffectual because the duke's lines were porous and Antwerp could be
supplied by sea, but the duke was in luck because the city decided to blockade
itself voluntarily. The magistrates of the city declared a maximum on the price
of grain. The smugglers who had been running the blockade up to that point
became considerably less enthusiastic about making food deliveries after that.
Facing starvation, the city surrendered the next year.

6.
The Gold Factory of Venice

In 1590 the Republic of Venice was
in decline. Nineteen years earlier it had gloriously fended off the Ottoman
Turks by a tremendous victory at the Battle of Lepanto, but had nevertheless
lost Cyprus, the republic's greatest possession. In 1585 the newly elected doge
had thrown silver coins instead of the traditional gold at his ascension.
Weighed down by taxes, imposts, tariffs, duties, tithes, assessments and fees,
the economy had seen better days. From out of this gloom a new hope
unexpectedly appeared. A long-lost Venetian named Marco Bragadini, currently
resident in nearby Lombardy, had discovered how to make gold. The republic had
to act fast, though, because the duke of Mantua was trying to lay his hands on
this valuable goose. A cohort of soldiers was sent forthwith and Bragadini was
securely delivered into the city in triumph by three galleys. Rigorous
scientific tests were ordered by the senate to verify the power of the
"anima d'oro," which Bragadini alone possessed. The alchemist filled
a crucible with quicksilver, added a pinch of his secret powder and set it to
fire. Soon the quicksilver turned to gold; it was all true. The price of
alchemist capes and retorts skyrocketed. Signor Bragadini coolly informed the
senate he could produce six million ducats or whatever they would require. For
himself he wanted nothing but to be the humble servant of his country.
Naturally, the senate put all the resources of Venice at his disposal. Nobles
flocked to Bragadini by the dozen, imploring him to cut them in on his
business. The months wore on, but the production of the new gold factory was
disappointingly meager. Apparently there were limits to the speed with which
the gold could be manufactured. Sensing a mounting impatience with his
operations Bragadini absconded to Munich where Duke William the Pious was
wooing him. Unfortunately for the maestro, in the meantime Pope Sixtus had died
and been replaced with the sanctimonious Pope Gregory XIV who considered the
alchemist and his two dogs to be the devil's spawn and sent orders for their
execution — with which William complied. The senate of Venice decided to
pretend the whole thing never happened.

7.
How to Deal with Hoarders

As the famine-fueled French
Revolution careened out of control in 1793, a radical clique called the
"Committee of Public Safety" headed by Maximilien Robespierre took
power. The committee resolved to solve the food problem by enacting the "General
Maximum," a set of policies fixing the maximum price of bread and other
common goods. When those measures failed to increase the supply of food, they
sent soldiers into the countryside to forcibly seize grain from the evil
farmers who were "hoarding" it. Robespierre and the committee went to
the guillotine the next year.

8.
A Hobo's Dream, An Empire's End

In 1880, railroad technology was
advancing rapidly, and the Russians received several private petitions for a
concession in the Far East. To the paranoid patricians of Moscow, it was not
enough to merely deny these foreign schemers; they needed to build their own
railroad to the east to keep them out. Under the leadership of His Royal
Paranoidness, Czar Alexander III, the Russian state began taking out massive foreign
loans and constructing the 5,000-mile Trans-Siberian Railway, the largest
civil-works project since the Great Pyramid of Giza. Alexander (and his empire)
would later die from injuries sustained in a railroad accident. By the time the
corruption-ridden boondoggle was completed in 1904, Alexander's son, Nicholas
II, was technically bankrupt. Wars and revolts started to plague the empire.
Instead of carrying trade goods, the new railway was carrying political
prisoners and supplies for soldiers. When Russia rolled over its debts in 1907,
it was obvious to the large banking houses that the empire was financially
doomed and only small investors could be found to subscribe the new loans. Even
with these loans suspended, Russia's economy was so weak that it would not
survive the coming war. Nicholas was executed July 16, 1918.

9.
It Takes a Village to Build a Famine

The 1984 crop failure in Ethiopia
presented a fresh set of problems for the Marxist junta called the
"Derg" that controlled the government. The nationalization programs
and price controls they had been experimenting with for years seemed less
effective than ever. Obviously the remnants of capitalism were still infecting
the economy, so they took vigorous measures such as outlawing grain trading. Oddly
enough, that did not stop the famine. The chairman, Mengistu Haile Mariam,
inspired by the brilliant agricultural successes of Secretary Stalin in the
1930s thereupon sponsored a whole new idea dubbed "villagization. "
Under this plan the scattered rural inhabitants of Ethiopia would be gathered
together in modernized villages with all the latest civic infrastructure. As
might be expected, not all the beneficiaries of this plan realized what utopias
these villages would be so they had to be driven there at gunpoint for their
own good. Unfortunately, the expected increases in agricultural production
never materialized and millions starved. The country descended into a permanent
state of civil war, which only ended in 1990 after the Soviet Union stopped supplying
the Derg. Mengistu fled to Zimbabwe where he has become an important advisor to
that nation's rulers.

10.
Rubles: Now You See Them, Now You Don't

On January 22, 1991, Mikhail
Gorbachev, the president of the Soviet Union, decreed that all existing 50- and
100-ruble banknotes were no longer legal tender and that they could be
exchanged for new notes for three days only and only in small quantities. This
had the effect of instantly deleting large portions of the savings and
accumulated capital of private citizens. He followed up this genius move on
January 26, by ordering that the police had the authority to search any place
of business and to demand the records of any business at any time. The union's
economic problems accelerated into a death spiral. Gorbachev resigned on
December 25, and on the next day the Supreme Soviet dissolved itself and the
Union of Soviet Socialist Republics.