How The Bubonic Plague Actually Saved Europe In The 14th Century


Studying the history of financial crises can be quite enlightening.

Deutsche Bank’s Peter Hooper just published an interesting report considering crises going back to the Middle Ages.

Referring to the work of Juesus Huerta de Soto, Geld, Bankkredit und Konjunkturzyklen, and Stuttgart, Hooper summarizes what happened during the European credit crisis of the 14th century.

What’s interesting is how the country got out of the crisis.

From Hooper’s note (emphasis added):

In the early 14th century banks in Florence engaged in a large-scale credit expansion. This set the stage for a powerful economic upswing, which transformed Florence into the most important centre of finance and trade in the Mediterranean region. But the bankruptcy of England, a repatriation of funds to Naples and a bust of Florentine government bonds ended the credit cycle and triggered a crisis. Banks crashed and credit contracted (described in historical records as “mancamento della credenza” – we would call it credit crunch today). Real estate prices declined by 50%. It took 30 years—from 1349 to 1379— before a recovery began. Historians ascribe a role to the plague in recovery, which dramatically raised cash balances per capita (by lowering the denominator) and induced people to spend (by dramatically raising the discount rate for future consumption). As a result, deflation ended and output recovered.

“Lowering the denominator” is a nice way of saying that the plague killed a bunch of people leaving excess wealth to the survivors.

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