Paper Money: 353 Years of Wanton Destruction of People's Purchasing Power

Sovereign Man's Simon Black on the 353th birthday of paper money and the unlearned lessons from the past:

If you ever find yourself vacationing in the western Pacific, I highly recommend swinging by Yap Island, home of one of the most bizarre forms of money in history.

Over a thousand years ago, natives would mine enormous chunks of limestone and carve them into gigantic circular discs. 

I’m talking REALLY big… a typical disc would be 5 to 10 feet in diameter, over a foot thick, and weigh several tons. 

They called them ‘Rai Stones’, and they were actually used as currency. Curiously, an indiviaul rai would be valued not based on its weight or size, but based on its story. 

If many people had been killed transporting it, or if the stone had once belonged to a famous warrior, the rai would be worth more. So it was a bit of a collectible as well as a form of money. 

Needless to say, the sheer size of these stones meant that they wouldn’t be moved very often. Everyone on the island just sort of knew who owned each rai, like a primative form of Bitcoin’s blockchain. 

The polar opposite of this is the paper money system, something that has its origins in the Han Dynasty over 2,000 years ago. 

It wasn’t quite paper, but the ancient Chinese experimented with leather-skinned money as early as the second century BC. 

The idea died for over a thousand years in favor of (mostly) gold and silver. But it popped up again in the Middle Ages where Chinese merchants used short-term credit notes rather than haul around heavy coins. 

When the Mongols basically took over the entire planet, they adopted this idea, much to the astonishment of their European visitors. Marco Polo writes of this in his diary with total incredulity:

“The Great Kaan causeth the bark of trees, made into something like paper, to pass for money all over his country. . . And nobody, however important he may think himself, dares to refuse them on pain of death.” 

But it wasn’t until 1661 that the first modern paper money was born. 

Johan Wittmacher was a Latvian merchant of Dutch descent who had a burning idea he wanted to try; he just needed a willing country. 

Wittmacher moved to Sweden and tried several times to obtain a banking license. Finally, after promising a 50% profit share to King Charles X Gustav, his license for Stockholms Banco was approved in 1657. 

On July 16, 1661, his bank became the first in history to issue paper banknotes– Kreditivsedlar. 

These Kreditivsedlar solved a huge problem for Wittmacher. All the gold deposits he was holding on behalf of bank customers were primarily short-term. Customers would frequently withdraw coin, so he needed to keep inventory handy. 

On the other hand, he wanted to increase profits by loaning out his customers’ gold. Problem was, most of the loans were longer term. 

Wittmacher’s dilemma was satisfying his customers’ short-term withdrawals while still making long-term loans. The solution was paper. 

When a customer would make a withdrawal, Wittmacher gave them paper notes as claims on the gold he was holding. 

The customer could use the notes to pay for goods and services, and Wittmacher got to keep the gold and make more loans. 

In time, the notes became a popular medium of exchange, accepted everywhere just like gold. People would pass them around as money, only occasionally showing up to the bank to redeem them for gold.

Naturally it didn’t take long for Wittmacher to start committing fraud. Before long he’d issued more notes than he had gold in his vault. And he was making more loans than the bank could afford. 

After only seven years, the bank collapsed. But the idea of paper notes lived on to infect the evolution of money ever since.

Read the rest here 

Aldous Huxley was spot on when he wrote:

That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.