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The Prospects of More QE for Economic Stimulus: A Lesson from History

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In today’s Wall Street Journal, Jon Hilsenrath and Kristina Peterson report, “The Federal Reserve is heading toward launching a new round of stimulus to buck up the weak economy, but stopped short of doing so right away.” The predicted means of stimulating the economy is another round of the unconventional policy of quantitative easing (QE), i.e. when a central bank purchases financial assets from the private sector with newly created money in effort to spark economic growth. Thus, the quantity of US dollars would be increased, debasing their value and causing inflation.

The authors note that this strategy has received significant criticism:

Critics say there is little more the Fed can do to help, having already pushed short-term interest rates to near zero. They contend its unconventional actions could do more damage by sparking inflation, and that in the meantime the Fed is punishing savers who are getting little return on their bond investments.

I cannot help but agree with the critics on this one. Intentional monetary debasement has existed since time immemorial and has a very bad track record. We can see this in Spanish scholastic Juan de Mariana’s 1609 Treatise on the Alteration of Money.

“In serious issues,” writes Mariana,

it is not fair to advance subtle and speculative arguments from our own heads and thoughts. They are frequently deceptive. It is better to do battle with data from our own time and from our ancestors. This is the safest approach and the assured way to the truth because the present is certainly similar to the past. What has happened will happen. Previous events are very influential: They convince us that what sets out on the same path will reach the same conclusion.

He continues, “Some disadvantages appear to be great but, in reality, are not. We could put up with them to avoid the greater disadvantages that derive from the alteration of money.”

Mariana is writing having given a thorough account of monetary policy in Spain over the previous centuries. Every time that money was debased (copper being added to silver coins, for example, so that a silver coin of a certain weight would contain less silver than previous ones made of pure silver), despite short-term benefits to king and country, the policies ultimately hurt not only the king’s subjects, but the king himself as well. Similarly, Sam Gregg notes that seeking  short term advantage through inflationary policies instead of long term stability is the reason that most countries left the gold standard in the twentieth century.

Mariana highlights one major disadvantage to currency debasement as follows:

The cost of trade will be in proportion to the debasing of money. This is not simply a private judgment. Rather such were the evils our ancestors experienced when our money was debased. In the history of the reign of Alfonso the Wise (chap. 1), reference is made to the alteration of money at the beginning of his reign…. This money change resulted in general inflation. To remedy this situation… the king taxed all sales. His remedy, however, caused the ailment to break out again. The merchants refused to sell things at that price. Necessarily, things came to a halt lest he arouse the hatred of the nation or especially (as we believe) the arms of his nobles, who, after he was driven out, transferred affairs to his younger son, Sancho.

Yet, despite this and other historical examples, Mariana notes,

Some believe and maintain that if the [legal] value of silver were increased, the state would benefit to a greater or lesser degree. If this is true, one must ask: If someone wishes to buy 8 ounces of debased silver for 65 silver coins as its value is set by law, would the seller comply? Of course not! He will not sell it for less than 130 new silver coins which is almost the weight of the silver itself….

There is no doubt that it leads to new money. Each of these developments will contribute to commercial inflation. Abundance of money makes it worth less. As in other commercial enterprises, [increased] supply leads to low prices. Next, the baseness of the coins will cause those who have this money to want to get rid of it immediately. Merchants will not wish to exchange their goods for that money, except with a great increase in price. All this leads to [another] disadvantage: There will be trade difficulties, and trade is the foundation for public and private wealth. This problem always arises with debasement of money. Taxation of goods and sales to increase prices is a rather deadly solution to the problem. This approach is burdensome for merchants, and they will refuse to sell at that price. Once trade is destroyed and commercial inflation is in place, all the people will be reduced to want, and that will lead to disturbances. Thus, as experience has frequently taught us, the new money is either completely recalled or is certainly devalued; for example, by half or two-thirds. Then suddenly and as in a dream, someone who had 300 gold pieces in this money, now has 100 or 150, and the same proportion applies to everything else.

As for the effect that inflationary policy has on the king, to whose advantage it is supposed to be, Mariana writes that “the king’s subsequent poverty… is certainly inevitable.” He explains,

A king receives no income from his ruined subjects and cannot prosper when the country is sick. Both these reasons are closely connected. If the citizens are crushed with penury [extreme poverty] and if trade is in turmoil, then who will pay the king his customary revenue? The tax collectors will collect much less royal tribute. Are these statements dreams? Are they not verified by much history?

Last of all, he notes,

We conclude with the final disadvantage, the greatest of them all: The general hatred that will be stirred up for the prince. As a certain historian says, everyone takes responsibility for prosperity, the head is responsible for adversity. How was the victory lost? Obviously, the supreme commander was imprudent in organizing his battle lines, or he did not pay the soldiers the salary owed them…. Because of well-remembered misfortunes, the people of Aragón, in the dedication to, and interest in holding onto their freedom, demand from the king at his coronation an oath that he will never alter money…. This is, doubtless, a healthy and prudent precaution.

Inflation hurts commerce and leads to increased taxes. This, in turn, leads to increased economic hardship and finally to civil unrest. Comparatively, some inflationary policies of Medieval Spain were far more extreme than today’s QE, but the same adverse effects can be expected, even if only at a smaller proportion. This led the people of Aragón to demand an end to inflationary policies from their government. Doubtless, such would be “a healthy and prudent precaution” for us today as well.

Mariana concludes by saying,

Greed causes blindness; financial straights create pressure; we forget the past. In this way, the cycle of evil returns. Personally, I wonder if those in charge of affairs are ignorant of these things. If they do know them, I wonder why they so rashly, despite their prudent knowledge, wish to rush headlong into these perils.

I wonder the same myself.

Dylan Pahman Dylan Pahman is a research fellow at the Acton Institute, where he serves as managing editor of the Journal of Markets & Morality. He earned his MTS in Historical Theology from Calvin Theological Seminary. In addition to his work as an editor, Dylan has authored several peer-reviewed articles, conference papers, essays, and one book: Foundations of a Free & Virtuous Society (Acton Institute, 2017). He has also lectured on a wide variety of topics, including Orthodox Christian social thought, the history of Christian monastic enterprise, the Reformed statesman and theologian Abraham Kuyper, and academic publishing, among others.


  • Milton Friedman

    have you checked inflation rates lately? they are at historic lows. if the parade of horribles doesn’t happen, shouldn’t that cause you to reconsider your understanding of the economy? economists have learned quite a few things since 1609…

    • I’m not sure what “parade of horribles” you’re referring to. My point was that, given the comparative difference between QE and what happened in Medieval Spain, similar adverse effects on a much smaller scale may be expected. Perhaps we do have room for more inflation, but relative stability ought to be preferred. While you are right that economists have learned a lot since 1609, that
      does not change the value of learning from history. In this case, there
      are many economists today who, for similar reasons to Mariana,
      discourage inflationary policies. One reason, for example, that governments favor inflationary policies is so that they can pay back bonds with debased money, ultimately failing to fulfill what they have promised their bondholders. As Jon Hilsenrath and Kristina Peterson note, according to critics, “the Fed is punishing savers who are getting little return on their bond investments.” Bond investments, of course, are essential to any government’s bottom line. Any policy that will make them less attractive is a long term disadvantage, despite possible short term economic gain. For more on this (from a far more recent time), I highly recommend James Alvey’s article “James M. Buchanan on the Ethics of Public Debt and Default” in the Journal of Markets & Morality. See

      • Milton Friedman

        None of the inflationary impacts of QE have occurred since it became Fed policy back in 2008. None. If anything, QE helped stave off deflation and a rapid contraction in the money supply, which was the cause of the last Great Depression and not something we needed a repeat of today. Saying inflation is an argument against QE is like saying HIV/AIDS is an argument against drinking Pepsi — when there’s no discernible link between the two concepts based upon an examination of the actual evidence, warning of the horrors of inflation or HIV/AIDS becomes little more than wasted words on behalf of a strawman.

        You say, “the Fed is punishing savers who are getting little return on their bond investments,” but the Fed only sets short-term interest rates. Long-term rates are set by market demand and even unconventional interventions by the Fed have minimal impact. The reason bond investors are getting such low returns on US Treasuries today is not because of QE or government intervention but because so many investors are choosing to buy these investments — investors view them as much safer investments than the alternatives. In other words, THE MARKET is telling us that inflation ISN’T a big concern and that US government debt IS a good, safe investment. Rather than reliance on linkages made by long dead economists, facts are a much better basis for evaluating whether economic theory holds.

        • How can you claim that there is “no discernible link” between inflation and QE, and then claim that it helped stave off deflation? Do you really not see that a connection between QE and inflation must be assumed for your claim to be true? Furthermore, I cannot fathom how you don’t see that printing more money causes inflation. Increase supply and the market value will fall for anything, including money. The question to be debated is whether or not that is a bad thing.

          You see the short term benefit of QE as a good thing. I worry that the long term disadvantages may outweigh the short term gain. Given that, as you note, we have only being implementing QE since 2008, the only way to predict the possible long term impact is to look at the historical track record of similar policies.

          I agree that we ought to examine evidence. How the historical track record of inflationary policies does not count as evidence to you is a mystery to me. The fact that I did not quote page after page of Mariana’s tedious analysis and instead focused on his conclusions in no way lessens the fact that his conclusions are, in fact, based upon evidence and logic.

          As for your second comment, you begin by attributing to me a quote that I attribute to Hilsenrath and Peterson and you ignore the basis upon which I made my statement, saying nothing regarding Buchanan on concealed default.

    • andy

      Really? How much do you pay for groceries vs 5 yrs ago? Gas? Water? My salary has almost doubled in 5 years (40%), and the purchasing power has remained almost constant. Clearly you have not understood some of your namesake’s writing on sound money, and the causes of the great depression. Also, inflation is a lagging indicator – you don’t see the damage until its too late – see argentina, weimar germany, mexico, japan, rome, etc.

    • Roger McKinney

      Obviously, economists have not learned a few things since 1609, since they keep repeating the same mistakes of the past.

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