Quote of the Day
If you put together all the Christians in the world, with their Emperors and their Kings, the whole of these Christians, – aye, and throw in the Saracens to boot, – would not have such power, or be able to do so much as this Kublai, who is Lord of all the Tartars in the world.
Marco Polo on Kublai Khan (Grandson of Genghis Khan)
The Grandson of Genghis Khan
Remember the story of that guy, Temujin, who came to be known as Great Ruler, or Genghis Khan? As a Mongol warrior, the bought the trust of a rival warlord (his father’s blood brother) by offering him the only money at his disposal: a rare animal fur. He then went on to slay his own blood brother, who had defected to become his fiercest rival, and set out slay anyone who stood in the way of him becoming the ruler of the World. Let’s face it, he probably got the closest any single human being has every gotten to achieving that feat.
Well, sable furs are one thing, but in the space of just two generations in China, currency innovation would take a leap that The West would take centuries to orchestrate. By the time Genghis Khan was the Great Ruler of the Greater Middle Kingdom, “flying cash” was flying all over the place and was already well entrenched as the standard money-form. Genghis Khan was wise to accept and adopt this sophisticated economy with its efficient transaction mechanism.
But, Genghis Khan would not live forever. Later, his Grandson, Kublai Khan, took to power as the first Emperor of the Yuan Dynasty and he decided to experiment a little more with the notion of flying cash. “Why did the currency have to be backed by anything with a limited supply, like gold or silver?“, he thought. Money was just paper. Why couldn’t he simply just print money whenever he needed it and ignore the notion of supply and stability? Kublai Khan began to simply print paper without any anchor to tangible money, such as gold or silver. Kublai Khan was seemingly creating wealth by magic, he was printing without the inherent discipline a currency with finite supply enforces. His theory would be to encourage people to use the paper money always and thus avoid any onset of Gresham’s Law by using an ancient technique he’d learnt from this Grandfather… paper money was law and he would chop the head off any person he found not using it. Et, voila! Backed by thin air and threat, the world’s first fiat currency was born.
Pirates and Travellers
To this day, when we think of “treasure” we think of gold and silver, pearls and emeralds. Sparkly things that would be of just as much value today as they would have been a thousand years ago. We do not think of a chest full of extinct paper fiat currency. If you’re a pirate and you have paper currency, you spend it. If you are a pirate and have jewels, you put it in a chest and bury it on a tiny island in the middle of the Pacific, leaving one copy of a badly drawn map in the possession of another pirate who can immediately identify the coordinates to the inch (despite the fact it could be anywhere and looks like a 3 year old drew it with a crayon). Everybody knows this – it’s a scientific fact, it’s a mutation of Gresham’s Law.
Well, back in the West (Europe) we had a few “educated travellers” who made it their mission to scamper East to find treasures of their own while miraculously avoided being slaughtered by pirates. In the 14th century Europe had an educated traveller out of Italy by the name of Marco Polo, a man who would be the inspiration for the great discoverer, Christopher Columbus. Marco Polo decided to see what this Asian revolution was all about. He travelled through the Greater Middle Kingdom where he mingled with Kublai Khan and the Mongol elite and made some interesting observations of his own, albeit through slightly rose-tinted spectacles.
The Archives of an Educated Traveller
The beauty of what Marco Polo did was, just like Genghis Khan, he was smart enough to carefully document and archive his observations. Incidentally, while many-an-Italian will be quick to tell you that Marco Polo did not introduce pasta to Italy, most will agree that the Chinese were eating pasta-like food as early as 3000 BC. A full 4000 years before any Italian saw a plate full of linguine. But I digress. As an educated traveller with a diligence for recording observations, one could argue that the biggest treasure Mr Polo brought back was INFORMATION. After all, it was eloquent Captain Jack Sparrow himself who said: “not all treasure is silver and gold, mate“. Marco Polo’s written word was indeed a great treasure, his works are publicised in many languages and still read frequently even today. Now, I’m going to be lazy and simply quote someone else’s passage from Marco Polo on the Mongol State, because what Marco Polo observed of the new “flying fiat currency” of China is something to behold.
It will not surprise Austrian economists to hear that the biggest state monopoly concerned the money supply itself. During an era in which Europe’s rulers could do no better than clip coins, the Mongols had succeeded in instituting fiat currency across much of their empire. As Ron Paul puts it, “The emperor, like the vast majority of politicians, found the lure of paper money irresistible”. Polo remarks that the Great Khan’s mint “is so organized that you might well say that he has mastered the art of alchemy”. Indeed, whereas alchemists never did discover the secret of transforming base matter into gold, Polo notes that the Khan’s procedure of issuing paper money “is as formal and as authoritative as if they were made of pure gold or silver”. The state not only turned worthless paper into money but also profited from the wear and tear of the bills: “when these papers have been so long in circulation that they are growing torn and frayed, they are brought to the mint and changed for new and fresh ones at a discount of 3 per cent”.
Get a load of this. Not only was Kublai Khan printing his own wealth, he was accepting old notes and issuing crisp, clean new notes for a fee of 3% – the cheeky devil!! Janet Yellen, Haruhiko Kuroda, Mario Draghi you still have so much to learn!
But can you imagine the productivity, the efficiency, the sheer velocity of this new Chinese economy? The autocrats controlled and enforced the money supply and liquidity was vast; trade was booming. If the state or rulers needed more money, they would simply print wealth into existence. Had Kublai Khan, as Marco Polo inferred, conjured the magic of economic alchemy?
For a while the fantasy persisted. But, alas, utopia is not a place where authoritarians print wealth into existence. The wheels began to fall off the cart, the emperor was wearing no clothes… and many more appropriate metaphors as well. I quote again (because I’m lazy). This time a partial excerpt from A History of Money in Ancient Countries.
Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both, and the inevitable consequence was depreciation. All the beneficial effects of a currency which is allowed to expand with the growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth.
These effects were not slow to develop themselves.cessive and too rapid augmentation of the currency, resulted in an entire subversion of the old order of society. The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion.
… and the same literature goes on to quote…
During the last days of the Mongol dynasty^ in 1351, an effort was made to reform the currency; but by this time the evil lay too deep for remedy; for many kinds of paper money were in circulation ” government, provincial, and private ” besides many counterfeits; and the government was powerless to limit the circulation. The notes therefore continued to depreciate.
The Chinese, once again, were millennia ahead of their time – not only with pasta, but with fiat currency too. Where it took the Romans centuries to truly obliterate their currency the Chinese succeeded in just a couple of decades. But, while, the flying cash crashed and burn down to Earth at the first bump of turbulence, China had set a precedent. A precedent for systemic financial control, via a currency which could be magically created by the few to be consumed by the many.
*Little sidebar. Marco Polo was so intertwined with the Mongol Rulers in particularly Kublai Khan. Given that the Mongolians were admired for their amazing horsemanship in particular a game called “Polo” or The Game of Genghis Khan, it’s natural to draw the conclusion that the name polo is derived from the great explorer Marco Polo. Actually, it is thought that the name for the sport comes from a Tibetan word “pulu” which means “ball”.