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Part 1: The evolution of money in its many forms

Read the first of three excerpts of The Curse of Cash, the new book from Harvard University economist Kenneth Rogoff which was released on September 7.
Above, an illuminated manuscript shows Kublai Khan sits on his throne while members of his entourage pay for goods with paper money made from the bark of the mulberry tree. Art Media / Print Collector / Getty Images
Above, an illuminated manuscript shows Kublai Khan sits on his throne while members of his entourage pay for goods with paper money made from the bark of the mulberry tree. Art Media / Print Collector / Getty Images

In his new book The Curse of Cash, which was released on September 7, the Harvard University economist Kenneth Rogoff argues for the near-total abolition of paper money, on the grounds that technology has made it outdated, that criminals love the stuff (especially the big bills) and that it constrains the ability of central banks to impose negative interest rates.

But for the general reader, perhaps the most captivating parts of the book come when Rogoff provides context for his case by considering the history of currency and how cash is being used around the world these days.

Today, in the first of three excerpts, we go back to the very beginning.

The excerpt

The most interesting part of the story of currency starts with the development of metal coins. There have also been a plethora of commodity currencies, including whale’s teeth in Fiji, rice in the Philippines, feather money in Santa Cruz, grain in India, cowrie shell money in large parts of Africa and China, cattle in Colombia, and wampum beads in the United States. Paul Einzig devotes a chapter in his classic book on primitive monies to The Slave Girl Money of Ireland, an abhorrent practice not restricted to ancient Ireland. Even after modern currencies were invented, commodity currencies have continued to be used in times of duress, and it could happen again. Cigarettes and gasoline were used at times as currencies in Europe after World War II, as war-torn economies struggled to regain basic functions.


The Curse of Cash

Read second excerpt: Big bills in dark corners

Read third excerpt: Show me the money


The true invention of modern metallic coinage is generally thought to have started in Lydia (in modern western Turkey) in the seventh century BC. Made of electrum, a naturally occurring alloy of gold and silver, Lydian coins were hand struck and stamped with an image on one side (for example, a lion), leaving a punch mark on the other side. The idea of having a relatively uniform transaction medium, with the government standing behind it as the guarantor of quality, can be listed as one of the quantum breakthroughs in the history of civilisation. Standardised coins may now seem obvious, but at the time it was pure genius. Many economic historians assume the technology of coining arose in the private sector and was then largely taken over by the king, but it is hard to know for sure. Although many of some 300 issues of Lydian coins that have been identified are private, it is difficult to establish whether these came first.

Even though the birth of standardised coinage is something we now recognise as a transformative technology, it took almost eight decades to radiate outside a few neighbouring Greek states. The real explosion in coinage came after another technological breakthrough, as the Lydians learned to separate electrum into pure gold and silver. This allowed King Croesus to stamp out pure coins in either metal. Croesus ultimately was defeated by the Persians, but he and his coinage live on in the phrase “rich as Croesus.”

As Lydian coins spread in trade, they were imitated elsewhere, most importantly by Athens, which had the good fortune of access to silver in mines in Attica to the south. The Athenian “owls,” named after their imprint, soon traded far and wide. Some economic historians assign Athenian coinage technology a central role in the Greek state’s capacity to build the ships that defeated King Xerxes and his invading Persian fleet in the battle of Salamis in 480 BC. Without the financial instrument essential to building the fleet, the flowering of western civilisation might have been stopped in its tracks, or at least so the victor’s version of history goes.

Alexander the Great is remembered far more for his military tactics than his economic acumen. Yet his exploitation of new ideas in currency was highly instrumental in creating the largest empire the world had ever known during the fourth century BC. Alexander made great use of the innovation of coinage in paying troops and providing provisions across unprecedentedly long supply chains. He faced the vexing problem, however, of how to deal with the fluctuating values of gold and silver coins in different parts of the empire. Alexander’s elegant solution was to simply declare a gold-to-silver value of ten to one, using a mix of stockpiles throughout his empire, and coercion to enforce it. Alexander’s approach made Macedonian coinage simple and useful, and a precursor to more modern versions of coinage. Nevertheless, as Sargent and Velde explain in their marvellously titled book The Big Problem of Small Change, it wasn’t really until the nineteenth century, when pure fiat currency became more widespread, that the problem of co-circulation of coins in different metals was truly solved.

The Chinese appear to have developed coinage independently of western civilisation, though there is naturally a debate over who came first. It turns somewhat on how crude a definition of “coin” one uses, and whether early private coins are counted. Early Chinese coins were minted as likenesses of cowrie shells, a commodity currency that had been used previously in China and had to be imported, as the shells were not found locally.

In China, unlike in Europe, such base metals as copper, tin, and lead served as the main raw materials for coins. Iron was also used. Because of the low value-to-weight ratio of these coins, one had to be able to carry heavy loads to pay large amounts. The Chinese did use silver ingots as stores of wealth and as a medium of exchange, as the Middle East and Europe did before the Lydians, but these were not standardised and coined.

Europe’s adoption of precious metals gave the European coinage much more versatility. Interestingly, though, China’s inferior coinage materials might have provided the impetus for its early introduction of paper money, the main technology we use today. China, of course, had fixed woodblock printing at least as far back as the Tang dynasty in the seventh century AD, and a moveable ceramic-type printing process around the time of the Song Dynasty in the eleventh century, long before Johannes Gutenberg produced his first Bible in 1455.

The history of early paper money in China covers seven dynasties, each with its own monetary rules and institutions. In addition, the important province of Szechuan had its own currency for a time. But paper currency did not develop overnight. The technology evolved, and public acceptance of paper evolved along with it. Chinese merchants and financiers originally came up with the idea of issuing proxy notes that could be redeemed for coin to avoid the difficulty and danger of transporting large amounts, a process that repeated itself much later in Europe. Proxy notes led to another major development – the use of provincial paper promissory notes so that China’s far-flung provinces could pay taxes to the center more easily and efficiently. By the early 800s, the central government had prohibited private operators and taken control itself of the provincial note issuance system. “Flying money” (nicknamed for its tendency to blow away in the wind) is considered by some Chinese historians to be the first paper money.

The heyday of paper money in China runs from the eleventh century through the fifteenth century. It was under the Mongol regime in China that paper currency reached something closest to its modern form, albeit absent any kind of institutional device to control inflation – like an independent central bank – that we now recognise as essential. When Genghis Khan’s grandson, Kublai Khan, ascended the throne of China in 1260, the paper currencies of previous regimes and local currencies had become nearly worthless. They were called in and replaced with a national currency of silver notes that had the unusual feature of being worth only half their face value in silver, if ever tendered for exchange at the Khan’s treasury. (Kublai Khan’s idea of creating a wedge between paper currency and the official unit of account was echoed centuries later in the ingenious Eisler-Buiter-Kimball scheme for paying negative interest rates.) Unlike many previous note issues, Kublai Khan’s notes had no expiration date.

By 1262, Kublai Khan’s government had prohibited the use of gold and silver as a medium of exchange, with the highly credible threat of death for those who dared disobey. By the late 1270s, convertibility into species became increasingly difficult, effectively transforming the Mongol currency into a pure fiat money. A pure fiat monetary regime is one in which the currency cannot be taken to the central bank or treasury in exchange for gold or silver, or any other commodity for that matter.

When Venetian merchant and adventurer Marco Polo arrived at the Khan’s court in the mid-1270s, few wonders of the East amazed him as much as China’s paper currency system. Polo ultimately devoted an entire chapter of his travelogue to the Chinese currency: “How the Great Khan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over His Country.” A few key quotes capture the main themes:

“In this city of Kanbulu [Cambulac-Peking] is the mint of the Great Khan who may truly be said to possess the secret of alchemists, since he has the art of making money.

“He causes the bark to be stripped away from mulberry trees (the leaves of which are used for feeding silkworms), and takes from it the thin layer that lies between the coarser bark and the wood of the tree. This being steeped, and afterwards being pounded in a mortar until reduced to pulp, is made into paper. When ready for use, he has it cut into pieces of different sizes, nearly square, but longer than they are wide … The coinage of this paper money is authorised with as much form and ceremony as it were actually pure gold or silver … [I]t receives full authority as current money, and the act of counterfeiting … is punished as a capital offense.

“When thus coined in large quantities, this paper currency is circulated in every part of the Great Khan’s dominions; nor dares any person, at the peril of his life, refuse to accept it … Upon these grounds, it may certainly be affirmed that the Great Khan has a greater command of treasure than any sovereign in the universe.”

Edited extract taken from The Curse of Cash by Ken Rogoff, published by Princeton University Press.

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Published: September 24, 2016 04:00 AM


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