Since his first term, both dollar depreciation and loose monetary policy have appeared central to President Trump’s agenda (Bordo and Levy 2019, Arslanalp et al. 2024). So far, during his second term, the dollar has depreciated (Cardani et al. 2025, Hartley and Rebucci 2025) and several of the administration’s moves risk eroding the international trust that underpins the dollar’s global role (Eichengreen 2025, Gensler et al. 2025, Leipziger 2025). At the same time, President Trump has repeatedly attacked the Federal Reserve and its chair, Jerome Powell, calling for persistently low interest rates and questioning the Fed’s independence (Demiralp 2024, Eichengreen et al. 2025, Gensler et al. 2025), a strategy already visible during his first term (Cecchetti and Schoenholtz 2017, Kind et al. 2020).
Concerns about the sustainability of US government debt have also intensified (Fatas and Panizza 2025). Because debt costs depend heavily on interest payments, some have argued that a deliberate dollar depreciation could reduce the burden (Miran 2024), in what has been dubbed the ‘Mar-a-Lago Accord’ (Fatàs and Panizza 2025). Such depreciation becomes more likely under systematically lax monetary policy, which in turn implies de facto fiscal monetisation. In other words, dollar depreciation, monetary accommodation, and debt sustainability could become three links in the same chain, a classic fiscal dominance story (Sargent and Wallace 1981).
Yet this is not only an American concern. Since the global crisis, successive downturns have renewed attention to the link between government financing needs, monetary accommodation, and currency depreciation. Recent years have seen the fastest and most widespread peacetime increase in public debt (Kose et al. 2021). Such indebtedness increases the likelihood of fiscal monetisation, raising the risk of inflation and currency depreciation (Alberola et al. 2021, Benigno et al. 2024, Orphanides 2021). The sterling crisis of September 2022 (Leeper 2023, Pinter 2023) illustrated how fiscal monetisation can damage a currency’s external value even in advanced economies.
Fiscal reputation and reserve currency in early-modern Venice: Credibility is not enough
For a country that issues an international currency, using depreciation to solve fiscal problems can be a dangerous game. As we show in our study of Venice (Masciandaro et al. 2025), the Republic’s unique experiment with a managed float of state-issued money between 1619 and 1666 offers a clear historical lesson.
Venice was a financial centre whose currency played a pivotal role in the international monetary system from the Middle Ages until well into the 18th century (Fratianni and Spinelli 2006, Flandreau et al. 2009). Between 1619 and 1666, the Republic of Venice put in place what is arguably the first-ever experiment of purely managed state-issued money.
During this period, Venice faced two significant idiosyncratic real shocks – the bubonic plague of 1629–31 and a war in 1648–50 – that forced the Venetian government to monetise deficits through the Banco del Giro (Ugolini 2017, 2020, Goodhart et al. 2021). As a result, the vicissitudes of the Banco del Giro between 1619 and 1666 provide an ideal case study to investigate the relationship between fiscal monetisation and currency depreciation under a flexible exchange rate regime.
The Banco del Giro – a public bank with no formal separation from the government – issued fiat money which could be easily used to systematically accommodate the Republic’s fiscal deficits. The Banco money, at that time, was formally inconvertible into specie upon demand. As a result, its price floated with respect to both circulating coins and foreign currencies. However, contrary to other early monetary experiments, such as John Law’s system in 1720s France (Velde 2007), the mechanism was not intended to have an inflationary bias. Banco money supply was kept under control through regular redemptions into specie at the government’s initiative, but not at its counterparties’ initiative. The government’s fiscal stance preserved the sustainability of redemptions.
The monetary regime in place in Venice from 1619 to 1666 can be interpreted as a form of contingent commitment by the government to stabilise the external value of the currency through the implementation of money-market operations. The literature on contingent commitment has suggested that in such a regime, departures from fiscal discipline in the case of well-identified emergencies can be less disruptive, provided that such deviations are implemented by a credible government (Barro 1987, Bordo and White 1991, Bordo and Kydland 1995, Newby 2012).
Figure 1 shows the evolution of the average exchange rate between a sample of 16 currencies and the Venetian ducat, together with the evolution of the Banco del Giro’s liabilities. The figure provides a visual overview of the association between exchange rate depreciations and fiscal monetisation in the Venetian Republic. For example, between April and June 1630, liabilities rose by around 30%, coinciding with a sharp depreciation of the ducat. By December 1630, liabilities had fallen by 45% and the ducat had nearly regained its value. A similar pattern occurred during the 1648-50 war: expansion of liabilities produced depreciation, followed by appreciation once liabilities contracted. Our empirical analysis (Masciandaro et al. 2025) confirms this association. Even controlling for commodity prices and other factors, fiscal monetisation consistently produced ducat depreciation.
Figure 1 Dispersion of the 16 bilateral ducat exchange rates
Note: The figure shows the interquartile distribution of the bilateral exchange rates between the Venetian Banco ducat and each one of the 16 currencies whose data are available in more than 98% of the archival documents between 1627 and 1684. To improve the graphical representation, for all cities/fairs, we set the exchange rate equal to 100 in January 1627.
Our analysis suggests that the managed float regime produced sharper but more short-lived movements: depreciations were followed by relatively quick reappreciations, unlike under convertibility. After 1666, however, large macroeconomic shocks led to repeated suspensions of convertibility and much more prolonged depreciations of the Venetian currency, as during 1714–39 (Roberds and Velde 2016).
Do not forget Venice
For the first time, we have digitised the original bulletins of the Rialto market, preserved in the Saminiati-Pazzi Archive at Bocconi University. This effort allowed us to reconstruct high-frequency exchange rate series between Venice and 32 other cities for the years 1627-84. With this unique dataset, we can directly observe how fiscal monetisation shaped currency dynamics during two major shocks: the plague of 1629-31 and the war of 1648-50.
Our evidence shows that, despite Venice’s longstanding reputation for fiscal prudence, episodes of deficit monetisation had an immediate and pronounced negative impact on the external value of the ducat — with potential long-term costs for its credibility.
The Venetian experiment of 1619-66 demonstrates that even without a formal commitment to convertibility, a government can manage the float of state-issued fiat money in ways that effectively mimic it. But the ability to stabilise exchange rates crucially depended on the time consistency of the monetary-fiscal policy mix. Even a fiscally credible government could not shield its currency when resorting to non-Ricardian fiscal monetisation.
At a time when fiscal monetisation has re-emerged as a policy option, this historical lesson should not be overlooked by today’s policymakers, in the United States and elsewhere.
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