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.

Infographic: History of Money (1821-2012)

This wonderful infographic from Goldmoney.com (Thanks to Paul Buitink of Goldmoney)

To know more about the history of money check out Murray Rothbard's What has Government Done to our Money

Paper Money’s Usefulness

In Zimbabwe, the former Zimbabwe dollar was used as toilet paper or for mural décor.

Hungary’s Central Bank discovers a new use.

From the Telegraph (hat tip Professor Robert Murphy)

Hungary's central bank is burning old monetary notes to help the needy in Europe's deadly cold snap.

The bank is pulping wads of old notes into briquettes to help heat humanitarian organisations.

"It's a very useful charitable act, a vital aid for our foundation because we can save part of our heating costs," said Krisztina Haraszti, the head of a centre for autistic children in the impoverished northeastern town of Miskolc.

It helped the centre, which also provides aid to autistic adults, save between 50,000 and 60,000 forints (£200) a month, which is a "considerable sum in this time of crisis," she told AFP.

Since the briquettes have a high calorific value, "one only needs to add a few bits of wood and the rooms are really warm," said Haraszti.

As Voltaire once said "Paper money returns to its intrinsic value—zero."

Greeks Go For Gold

Ah, paper money versus gold.

When the public lose trust on the highly flawed system that had been imposed on them, they revert back to the old tried and tested ways.

That applies to the Greeks who are reportedly rushing to acquire Gold to secure their savings.

From the Financial Times [bold highlights mine]

Greek citizens are emptying savings accounts and buying gold as they brace themselves for the possibility of a sovereign default and a run on the banks.

Pledges by socialist prime minister George Papandreou that his government would “save the country” have been widely discounted by the public. However, parliament gave him a vote of confidence late on Tuesday night. The socialists have a six-seat majority in the 300-member house.

Sales of gold coins have soared as savers seek a safer and fungible source of value...

Monthly bank withdrawals were running at €1.5bn-€2bn (£1.3bn-£1.8bn) in the first quarter. Last year, depositors withdrew €30bn, equivalent to 12.3 per cent of total savings, according to the central bank. Greek deposits worth an estimated €8bn were transferred to banks in Cyprus in 2010. But the flow has dried up this year amid fears that Cypriot banks could suffer contagion.

Andreas, a supermarket manager, transferred the family savings to Munich earlier this year: “The Swiss banks aren’t interested unless you’ve got several hundred thousand euros.”

“We can’t trust the politicians to get us out of this mess [and] have to protect our families,” Sakis, a garage owner, said at an anti-austerity protest in Athens’ Syntagma square. “A bank collapse has got to be on the cards.” He added he had withdrawn his savings and placed them in a bank safe deposit box “for security. Who cares about interest right now?”

Politicians can fool us most of the time, but not all of the time. Eventually economic reality prevails and fraudulent promises are exposed. It's been this way for ages.

From Paper Money to Food Backed Money?

Since last year's market crash we noted of the reemergence of barter as way of conducting trade among nations. Essentially the difficulties or gridlock in the US banking sector has prompted many nations to administer direct bilateral exchange.

Now in some areas of the US, we read of accounts where local trade have been conducted with "local" currency units. But in contrast to merely paper money, the local currency called "Mendo Credits" reportedly is backed by "Food".
This interesting article from Jason Bradford at the Oil Drum

``Mendo Credits is a new food-backed local currency project partly funded by a grant from the California Endowment...

``Mendo Credits are backed by a tangible asset. In other words, Mendo Credits are a “reserve currency” as opposed to a “fiat currency” like Federal Reserve dollars. Many people are familiar with money backed by gold, which was once the case with U.S. dollars, but Mendo Credits are backed by reserves of stored food. Our reserve currency has a number of desirable properties at this time in history.

``The asset value of Mendo Credits remains stable over a significant time period because we lock in an exchange rate for specific quantities of food for one year from the date of issue. Whereas gold and silver are inedible, Mendo Credits can be redeemed for the sustenance of life. When you hold a Mendo Credit note, you know it represents the quantity of food printed on its face and, if you want or need to, you can actually get that food..

``Mendo Credits are just beginning to circulate in the town of Willits, CA and we hope this spreads around our region. Four central downtown businesses are serving as sales outlets for the new currency: The Bank of Willits, Mendonesia Café, The Book Juggler, and Leaves of Grass Bookstore. NCO also sells them at the Willits Farmers’ Market."

Read the rest here

Bretton Woods II: Bringing Back Gold To Our Financial Architecture?

In our latest blog, Did ECB’s Trichet Fire The First Salvo For A Possible Overhaul Of The Global Monetary Standard?, we indicated that the incredible monetary stress in our financial system have prompted ECB’s Trichet to suggest for a return to the obsolete Bretton Woods standard.

Now Mr. Trichet’s advocacy seems to have been picked up by other European leaders. According to the Financial Times article, “European call for 'Bretton Woods II'”,

``European leaders yesterday united behind calls for a "Bretton Woods II" summit to redesign the world's financial architecture, with Britain arguing the meeting could also be used to seal a long sought global trade deal.

``Gordon Brown, Britain's prime minister, said the world should turn the financial crisis into an opportunity and reform global institutions, such as the International Monetary Fund, conceived in 1944 when western leaders met in Bretton Woods, New Hampshire, and mapped out a postwar financial order.

Since the defunct Bretton Woods was centered on the US dollar-Gold Fix, from where all other currencies were fixed to the US dollar, gold thus supposedly functioned as the main adjustment mechanism or as the "natural discipline" of the erstwhile financial structure until of course it had been abused and closed.

Yet, suddenly we notice a sharp pick up on gold priced in several currencies….

All charts from World Gold Council…

In Euro...

In Sterling...


In South African Rand...
In Australian Dollar...

In Canadian Dollar...
In Indian Rupee...
So what's the connection of rising gold prices to the proposed Bretton Woods?

Could it be that the varied gold markets are probably telling us of the imminence of the proposed shift to a new monetary architecture?

Could these signal the resurrection of gold "the barbaric relic" as money once again?

And are we witnessing the denouement of the 'Mises Moment'?