We were recently in Australia attending a conference hosted by the Gold Standard Institute– a body which aims to educate on the need for “sound money”. Or rather an unadulterated gold standard. Captain amongst the speakers was Professor Antal Fekete, whose writings we have featured previously.
But our award for the “most passionate performance” at the conference went to Darryl Schoon. Darryl, while being an American is of Chinese descent and majored in East Asian political science, so is well versed in the history of the region. The following is (hopefully) a simple summary of his lecture which covered the early days of paper money or fiat currency, which began in China, and which quite appropriately may now be in the process of also being terminated by China. (Keep an eye out for more on this in a future article – Professor Feketes 7 Point Manifesto on “What should China do?”)
And so onto our very brief history lesson and what it might teach us today…
Paper Money originally started in China as a means of exchange between trading houses. The trading houses noticed this means of exchange was trusted and eventually its use spread through all of Chinese society.
However they printed more and more and so eventually (as has been repeated many times since) they crossed the invisible line and inflation started to appear. This eventually led to the paper money system collapsing.
In the 13th century the Polo’s travelled to China and witnessed this paper money in action.
On return from his travels, Marco Polo was captured in a war between Genoa and Venice and imprisoned. It as here he told the tales of his travels to his cell mate who published stories of “burning rocks for heat” (coal) and of the “great Kublai Khan” who took bark from trees and converted it to money by writing on it.
The Khan was sharp enough to have a simple rule that saw his paper money widely used – if you didn’t accept his “legal tender”, you were executed!
Meanwhile Polo noted that the Khans own treasury was full of gold and silver. (hhmmm – notice the interesting parallel to the monetary system of today, where Central Banks hoard the gold and the people are required to use the paper money – although thankfully you just get imprisoned and not beheaded today!).
Anyway, Marco Polo was well trusted by the Khan who asked he become an ambassador for him and to communicate with the pope. Polo took this paper money to the Pope who thought it was the work of the devil and burned it – maybe we should do the same now!
Jumping forwards a couple of centuries and there were many episodes of paper money before China eventually outlawed it in the 1600’s.
Meanwhile in the west in 1694 King William was heavily in debt from fighting various wars (again notice any similarities with the present day???). The bank of England went to the King and had him agree to give them the authority to issue the “coin of the realm” in exchange for unlimited borrowing from them. (Not coincidentally this is the same arrangement that central banks have today with their respective governments.)
However unlike today, the paper money was issued alongside the gold and silver coins.
The bankers had charged interest on lending other peoples coins, but then they had the revelation that they could also do this with the paper which they created out of nothing! The perfect business model!
(As a side note, when USA’s President Roosevelt outlawed possession of gold coins in the 1930’s it too was because of an economic crisis and collusion between the powers – the government and the bankers.)
Anyway, this system worked so well, because it coincided with the industrial revolution and huge expansion of British society.
In the 17th Century the British credit based system allowed them to raise an army and conquer many lands. So the expansion of debt was a success – the British Empire rose on this tide of debt.
However they were halted in China and Russia where Marx’s ideas took hold and economic, civil and financial powers were combined to turn back the English.
Quite a few centuries have gone by, but there is a very peculiar symmetry in play now. It is now China and Russia who are embracing the free market and “real money” and the west who is steadily turning to Statism and Socialism.
And while most of us westerners have successfully been brainwashed to steer well clear of gold, the Chinese Government is actually encouraging its citizens to put at least 5% of their savings into gold and silver.
So keep an eye on China – they invented paper money, and so therefore know first hand the problems that accompany it only too well. It could well be China that eventually forces a return to a global gold monetary standard.
(For more detail on the monetary history of the last century and it’s implications for you today, get access to our Gold Investing eCourse here.)