NEWSLETTER ARCHIVES

World Currencies and Crises
by Hugo Drax

In our last newsletter, we examined the currencies of Europe, many of which have lately been subsumed into the EU euro.  Continuing east from Europe, it would make sense to examine the currencies of Asia.  Your thoughts might turn to the Asian currency crisis of the late '90s.  What was that all about?

To really understand Asian currencies in their historical context, we should go back to the thirteenth century and learn about the Mulberry bark paper money of the Mongol Emperor of China and the greater part of Asia; Kubla Khan.  You may have heard of this guy.      

This poem by Samuel Taylor Coleridge is one of the most famous unfinished works of epic poetry.  The person from Portnoy who interrupted him is one of the most infamous unknown scoundrels.

 If poetry isn't your cup of tea, try Marco Polo... 

 In the 13th century, Polo made a journey from his home in Venice across most of Asia to the court of Kubla Khan— in what is now Peking.  Polo's journey was made easier by the fact that most of the territory through which he passed was one vast empire, conquered by Genghis Khan and his "golden horde."  

Yet, even understanding the mulberry bark, paper money of Kubla Khan requires further penetration into the murky depths of history.  Khan's paper money was based on a widely used gold coin called the "bezant" or "solidus."  

We should first take a look at this Byzantine coin; then we'll move forward and examine the tragic results of the mulberry money. Next time, we can take a closer look at some of the currencies of Asia, and the modern repetition of an ancient crisis.

In the 4th century A.D., the Roman emperor, Constantine, made his capital at the location we presently know as Istanbul— across the strategic waterway of the Bosporus— which separates the Mediterranean from the Black Sea.  He called his capital Constantinople.  It was the seat of a vast trading empire which controlled most of North Africa, Egypt, the Levant, Asia Minor, Greece, Sicily and for a time, parts of the Italian peninsula. 

By 491 A.D., the need for a high quality gold coin for trade and commerce was clear.  The Byzantines began minting the gold solidus. The solidus, also known as a bezant, was coined with a fineness of .95, as are many gold coins of the 19th and 20th centuries. Its fine weight was about 65 grains; so the coins were around a seventh of a troy ounce.  

The quality of the coin was such that it was accepted freely and without question from China to Brittany; from the Baltic Sea to Ethiopia.  Bezants were not only used by Byzantine travelers and merchants, but by other countries as well.  Medieval England 's Exchequer accounts were kept in bezants.  

According to Antony Sutton in his epic, The War on Gold (1976), "Gold coins circulated by weight with other metallic coins and barter.  Barter inhibited debasement of gold coins, because it offered alternative media of exchange.  In the Byzantine bezant of constant purity and fineness we can identify the first worldwide gold standard."

So, how long did it last?  The solidus was minted from 491 to 1453 A.D., or for nearly a thousand years. We are used to thinking of that period as "the Dark Ages," but it was actually a great flowering of civilization.    

The fall of the corrupt Western Roman Empire brought peace to much of Europe, much lower taxes and much greater freedom for small landholders.  Many vital technologies, such as crop rotation, the iron plow, the ox harness, and the stirrup were developed in this time.   

In the 7th century, Islam was founded.  It, too, adopted a gold coin, the gold dinar (and the silver dirham) as standard for trade. The Islamic Caliphate, at its height, brought trade with gold and silver coins from Grenada on the Iberian Peninsula; across North Africa and Asia; all the way to Indonesia.  Its scholars adopted the Sanskrit numeral zero, formalized our system of numbers (we call them Arabic numerals to this day) and mathematics (at least through algebra, named for al Jebra, a famous Arab mathematician), and advanced our understanding of astronomy.  Many of the stars in the sky have Arabic names, such as Mizar, al Cor,and al Deberan.

With these two great gold-standard trading regions, knowledge flourished alongside trade.  Printing technology was developed in China and reached Europe in 1450 with Gutenberg's press.  Gunpowder was also developed in the Far East and brought many changes; including rocketry, fireworks, cannon and personal firearms.  The Italian city/states of Genoa, Bologna, Venice and Florence were flourishing centers of art, architecture, trade and scholarship, built with the fortunes of merchant princes.

As early as the 6th century, Constantinople had a system of street lights.  The game of "polo" was developed and gained national importance.  Byzantine princesses married to Venetians introduced the use of table forks in the West.  

As early as the 8th and 9th centuries, the Byzantines used gunpowder in their wars with the Arabs. Byzantium and the Caliphate offered a channel of communication with Europe and Africa to India, Persia and China.  Various districts of the Byzantine Empire strove to promote the export of industrial articles. Syria and Egypt, in particular, upheld their ancient positions as industrial regions, their activity expressing itself chiefly in weaving and dyeing and the manufacture of metals and glass. To this day, the steel of Damascus and the blades of Toledo are remembered for their quality.

In the 10th century, the first university was founded at Bologna. In the 13th century, both Oxford and Cambridge were founded.  Monasteries in Ireland began to divulge their libraries of rare manuscripts.  In the Caliphate, Europeans were able to find Arabic translations of the important works of Greek and Roman scholars and translate them back into European languages.  

Without the growing trade and commerce fostered by stable money in the form of gold and silver coins of reliable value, the Italian Renaissance... the scientific revolution... and many of today's leading industries would never have gotten started.

So, how did it all end?

It ended with a vast horde of tribesmen from the steppes of central Asia sweeping into China with their advanced saddles on horseback, armed with short bows.  Soon, this Mongol horde had conquered China and adapted itself with new Chinese technologies, including early cannons, and swept west. 

The Caliphate—  which had easily survived the meager efforts of Crusaders to invade its territory and which had re-captured key cities and ports from the Europeans—  fell before the massive onslaught of the invaders from the East. Baghdad was sacked in 1258 A.D., not by Crusaders, but by Mongols.  

After the death of Ghengis Khan, the great Mongol emperor, his sons divided his empire.  The "Aga Khan" is a Turkish remnant of the great family name.  Kubla Khan ruled much of the empire from China.  The Turkish Khans evolved into the Ottoman Empire, and it was the Ottomans who finally sacked Constantinople in 1453 A.D.

Unfortunately, for all their brilliance as horsemen, military strategists and imperial conquerors, the Mongol Khans were not so good at monetary policy.  Paper money would not be issued in Europe until 1574 (the Leyden taler formed from the pages of prayer books) and then only briefly for an emergency.  

Kubla Khan already had a system of paper money going when Marco Polo arrived in Cambaluc (now Beijing ) in 1275. Upon learning this, Polo was so overwhelmed by this "bizarre" process that in telling it in his narrative, he was convinced Europeans wouldn't believe him.

He wrote:  

"For, tell it how I might, you never would be satisfied that I was keeping within truth and reason!...He makes them take of the bark of the Mulberry Tree, the leaves of which are the food of the silkworms, these trees being so numerous that whole districts are full of them.  What they take is a certain fine white bast or skin which lies between the wood of the tree and the thick outer bark, and this they make into something resembling sheets of paper, but black.  When these sheets have been prepared they are cut up into pieces of different sizes.  The smallest of these sizes is worth a half tornesel... one a little larger still is worth half a silver groat of Venice.... There is also a kind worth one Bezant of gold, and others of three Bezants, and so up to ten." (My quotes from Polo are taken from Henry Yule's edition of "Travels" reprinted in Vissering, On Chinese Currency, Coin, and Paper Money (1877).)  

"All these pieces of paper," Polo continues, "are issued with as much solemnity and authority as if they were of pure gold or silver; and on every piece a variety of officials, whose duty it is, have to write their names, and to put their seals." 

You will immediately notice a similarity to your wallet full of Federal Reserve Notes, signed in facsimile by various officials, with various seals and symbols imprinted thereon.  

"And when all is prepared duly, the chief officer deputed by the Khan smears the seal entrusted to him with vermillion and impresses it on the paper, so that the form of the Seal remains stamped upon it in red: the Money is then authentic. And the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasures of the world."

You may now be imagining the horrifying effects of hyperinflation running rampant in Medieval China.  Polo tells more:

"And nobody, however important he may think himself, dares to refuse them on pain of death."  Everyone accepted them, because everyone else would, and there was that death penalty. 

And all the while they are so light that ten bezants' worth does not weigh as much as one golden Bezant." 

Polo goes on to describe how merchants from afar with gold or silver or any other trade goods that would be useful as money were compelled to exchange at the imperial mint in each town, noting that the Emperor "pays a liberal price for [the gold and silver] in those pieces of paper."

China had long used copper and iron for money.  The widespread use of iron money in heavy and unwieldy form led to the development of paper money - originally receipts for copper or iron, fully redeemable for specie. 

About 1000 AD, the state-issued paper money was made legal tender.  It was fully redeemable into iron, copper, silver, or gold, for 65 years or so.  Then the government decided to limit redemption to once every three years.  In practice, few bills were presented for redemption.  So, the government became more improvident, and mulberry bark paper notes were issued on a fractional reserve.  Three-sevenths of their value was on hand in gold, silver, copper, or iron.   

As the needs of the government grew, in terms of bureaucrats to feed, an army to maneuver, and even some naval expeditions, the government produced more and more paper money.  As with all such experiments, it ended in disaster.  Mountains of paper money were produced, commodities soared in price, and the whole system became unworkable.

This oppressive system of paper money was one of the reasons the Mongols were eventually defeated and thrown out by the Chinese.  To this day, India has peasants who accept only copper or silver coins and represent an impressive portion of those two commodities (enough to affect the price dramatically on recent occasion). 

It was not until the 19th century that Europeans brought paper money back to China.  Even then, the conversion of paper money to silver was a major requirement of each bank in the trading centers, such as Shanghai.  

Neal Stephenson in his brilliant novel Cryptonomicon (1999) opens with a street scene in Shanghai.  It is a Friday afternoon in November 1941.  The streets are filled with coolies (local Chinese laborers).  Each team is carting a box of paper money.  The paper money is all printed very cheaply on used newsprint.  Under the red ink, the old news stories in faded black ink can still be seen.  To keep in step, each pair of coolies is shouting a chant.  They are shouting because all around them are other teams keeping cadence with other chants. 

Each bank has sent teams of coolies to return all of the paper money that they have received which was issued by other banks over the last few days to the issuing bank.  The issuing banks each count the bills received-- and pay out silver coins—  which are duly transported back to the various banks.  All of the bankers are happy to issue paper money (instead of silver coins) but are unwilling to hold the paper of other bankers.   

On the particular day Stephenson describes, the Japanese military is approaching the city.  An artillery shell blows up a ship at the wharf, and the entire crowd of coolies scatters to the winds, leaving mountains of worthless paper littering the streets.

Now that we have the historical background to understand the history of paper money in the Far East, we'll explore the Asian Contagion—  the currency crisis of the late 1990s—  in our next newsletter. 

Until then, here's a song from one of my favorite films.

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Read Currencies and Crises Pt. 2 click here