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

Lessons from the Roman Era Devaluations

Writes Simon Black at the Sovereign Man

In his 1958 work State and Currency in the Roman Empire to 300 A.D., Sture Bolin outlines the systematic (and almost constant) debasement of the silver denarius coin of ancient Rome, which I have reproduced below:

Subsequent emperors became even more clever at debasing the currency; Caracalla (reign 211-217 AD) created a new coin, the Antoninianus, which had a face value far greater than its weight and metal content.

Under Gallienus (reign 260-268 AD), the Antoninianus was composed of less than 5% silver. By the time of Aurelian in 270 AD, further debasement was essentially impossible… though they kept trying.

Such debasement led to rampant inflation in the empire. A slave under the reign of Commodus that cost 500 denarii was five times as expensive under Septimius Severus. A second century modius of wheat (about 1/4 bushel) sold for 1/2 denarius. By the time of Diocletian’s price fixing in 301 AD, the nominal price was 200 times more expensive.

In Roman Egypt, where the best documentation on pricing has survived, a measure of wheat which sold for 200 drachmae in 276 AD increased to more than 2,000,000 drachmae in 334 AD, roughly 1,000,000% inflation in a span of 58-years.

In his 1960 work Roman Coins, historian Harold Mattingly remarked about Roman inflation that “[t]he Empire had, in all but words, declared itself bankrupt and thrown the burden of its insolvency on the citizens.”

Other historical examples abound, but Mattingly’s assessment sums it up the best.

Any government that resorts to debasing the currency is making a conscious decision to stick the people with the consequences of its insolvency.

The short of this is one of the history or the cycles of inflationism and financial repression, where political authorities repeatedly transferred the burden of their policy mistakes to their subjects. Put bluntly, politicians plundered the resources of their constituents through inflationism and financial repression to pay for their profligate ways. All of them, ex-post eventually, failed.

Today’s “unprecedented” pace of inflationism via the massive expansion of the balance sheets by global central bankers has been no different than the eon of the doomed Roman empire. The principle has been the same, but the application has been different.

In Roman times, inflationism had been about coin debasements, today’s inflationism has been coursed through central banking mostly based on digital computer keyboard inputs.

Remember, world governments today have fervently been attempting to put a rein on cash transactions from which they intend to gain wider control and greater access to the resources of the private sector—for the same intent as their Roman era peers.

History does not repeat itself, said Mark Twain, but it does rhyme. Alternatively, those who cannot remember the past, warned George Santayana, are condemned to repeat it.

The rhyme of condemnations beckons.

Weird and Amazing Currencies Of The World

The common impression is that currencies come only in the form of the paper money in your wallet or coins in your pocket. Or that gold, copper or silver once functioned as primitive form of currencies.

From today's modern society, that's true.

But from history's perspective, we realize currencies took in many forms...including the most bizarre ones.

This from CNBC's The Weirdest Currencies of the World

Just a few examples...

Edible Money!

``Salt is one of the world's oldest forms of payment. In fact, the word salary derives from the Latin "salarium," which was the money paid to Roman soldiers to buy salt. It was the main form of currency in the Sahara Desert during the Middle Ages, and was used extensively throughout East Africa. Typically, one would lick a salt block to make sure it was real and break off pieces to make change. Doty's block, seen here, is 1,500 years old.

``Other incredible, edible currencies include "reng," a yarn-ball of tumeric spice wrapped in coconut fibers that is used for trade in the Solomon Islands; cacao (or chocolate beans), widely used throughout Mexico and Central America; and Parmigiano Reggiano cheese, so highly regarded that it was used both as currency and bank collateral in Italy.

``One particularly inedible currency: the poisonous money seeds of Burma. Which if nothing else proves that money does indeed grow on trees — or at least bushes."

Deposed president for a currency's design!

``The African nation of Zaire, known today as the Democratic Republic of the Congo, doesn't have money to burn. So when the totalitarian regime of Joseph Mobutu was overthrown in 1997, the new government found itself in a cash crunch until it could design and print new currency. It's thrifty solution? It took large stacks of 20,000-zaire notes and simply punched out Mobutu's image."

Read more of the amazing but weird currencies and their stories here.