Marco Polo wrote about his trip to China 750 years ago in his book “Wonders of the World“. There were many things written in it that Marco Polo found unusual, but so much so that it was hard for young Marco to believe. “No matter how I describe it, you won’t believe it. It doesn’t make sense. ”
Marco was the first European to witness the invention that drives the world today. These were paper notes.
Or maybe not. Today’s currency is made of cotton fibers or flexible plastic, not paper. And the Chinese currency that shocked Marco Polo was not paper, but a black sheet of mulberry bark, signed by several government officials and with a bright red seal, with the permission of Chinese King Genghis Khan. Was The title of this chapter of Marco Polo’s book is, “How the Great Khan made the bark of a tree the currency of the whole country.”
But that’s not the point. Whatever these notes were made of, they were not valued by this material, like gold or silver coins. It was valued by government decree. Paper currency is called fiat currency. Fiat means “to be” in Latin. Genghis Khan had announced that the mulberry bark, which would have the official seal, would now serve as currency. And they said it was “done.”
Iron coins paper note
Marco Polo was amazed by the genius of this system. The currency in circulation was like gold or silver. But where was the gold that was not circulating? He was with the king.
Marco Polo first saw the currency, but it was not new. It began three centuries ago in Sichuan, China. Sichuan was a border province and was a target of attackers. Chinese officials did not want gold and silver to move to other areas. So he asked Sichuan to issue iron coins.
Iron coins were not practical. Iron was cheap. Two silver coins would carry as much iron as a person’s weight. (Salt currency would be lighter than that). And to get to the market, you had to carry more iron than the bargain. And not surprisingly, alternatives began to emerge.
One of them was Jiaozi. Instead of loading a wagon of iron coins, a well-known and trustworthy merchant would write a promise that he would pay.
And then something unexpected happened. These jiaozi themselves became a way of exchange.
Suppose I sold something to Mr. Zhang, who had a good reputation, and he paid for it. It is difficult to give iron coins when I come to your shop. Either I will write you a Jiozi on my own. Or if Mr. Zhang has a good reputation, I will give you his written Jiaozi. We both know that Zhang will abide by his writings.
Me, you and Mr. Zhang have created the initial paper currency. This promise can now be passed from one person to another.
This system of exchange of promises would be great news for Mr. Zhang because he would never have to keep iron coins. They could create currency at any time by writing on paper.
According to the Chinese government
The Chinese government first regulated the issuance of Jiaozi. Laws were made as to what they would look like. Then, over time, private jiaozi was banned and it all came to the Chinese government. The official jiaozi was very successful. They started moving from one area to another. Trade began on their basis. It then became a currency used in international trade as well. He made gold and silver coins useless. Because they were very easy to pick up.
Initially, coins could be exchanged for coins issued by the government. Just like in exchange for private life. This system was a system of exchanging paper promises from the original. Then it slowly moved to the FAT system. You bring the old Jiaozi to the government. It will be accepted and in return you will get a new thunderbolt.
China was ahead of the rest of the world in this innovation. It was a very modern step. This is the currency that the central bank issues today. The only promise of the government is that it will issue new notes in exchange for as many old notes as possible. And we have reached the point of currency in which the currency is a promise from the government and this promise is nothing.
Gold Behind paper
Fat money was also a lure for governments. The government can make its payments by issuing new currency. And if he does too much, it will result in the price of everything going up. But this greed is often difficult to stop. After its release, the official jiaozi continued. At the beginning of the eleventh century, it was devalued to ten percent of its original value.
It’s gotten worse. Weimar’s Germany and Zimbabwe are the worst examples, where the government’s addiction to issuing currency has devalued the currency and destroyed the economy. In Hungary, prices tripled every day in 1946. If you went to a caf ب in Budapest at that time, it would be best to pay first. Because after ordering and drinking coffee, the price may have changed.
Such incidents are rare and frightening. Because of these, some radicals believe that fat money can never be stable. And the gold standard is fine. When there was gold behind the paper. But economists now agree that linking currency to gold is a bad idea. Of course, we cannot be sure that our central bank will issue the right amount of new currency, but can we be confident that the miners will be able to extract the right amount of new gold according to the world’s demand? No, that doesn’t happen. Central bank discipline is the only effective solution.
It has been very useful to get out of the crisis by issuing currency with the help of printing press. This was successfully done during the 2007 global financial crisis. And here the printing press is idiomatic. New money is created in the global banking system, not in a printing press, but through a computer keyboard.
Today’s Marco Polo will look at this system with astonished eyes and say, “These great central banks make money by putting a few numbers on a computer screen in a spreadsheet !!”
Technology has changed, but what can money do? We will not be surprised.
Not only paper but also paper notes have been one of the most important inventions in the world since ancient China. But this invention itself is in decline. Computer numbers are taking their place in their various forms.