Monetary history part 4

This is why the
7th final world power the Anglo-American duel world power was prophesied
to be fragile.
Chris Duane who started the silver bullet movement often stresses leaderless
resistance. The Silver Bullet and the Silver Shield is about fighting the
predatory forces by withdrawing our capital from their system and stacking
real wealth. He coined the term listen to all follow none. He quite rightly says
marches and unrest do no good whatsoever. One ruler famously said "let
them march all they want as long as they pay their taxes" When buying silver
bullion and taking it off the market is a the most effective silver bullet that
can do far more good than protests or marches. It is also a silver shield to
protect yourself from the perfect storm that is historically due to repeat.
So the 7 kings prophesied in Revelation are Egypt, Assyria, Babylon, Medo-
Persia, Greece, then Rome then British-American world powers. Each of these
world powers were also symbolised by other beasts in the scriptures as can
be seen in this picture.
When I first presented this information to some monetary historians they all
said this is information that can not be found elsewhere. I said thank you for
saying that there is information in my book that can not be found anywhere
else. I am a very keen student of the Bible all my life and in recent years
monetary history, so I formulated these thoughts about the metal image from
Daniel chapter 2 and the monetary cycle that has repeated through history.
I am not the first to say the reason silver was so fitting for Medo Persia was
because of the silver monetary system, but I believe I am the first to say why
gold represented Babylon. Also why Copper was for ancient Greece as they
were the first to debase gold and silver with copper, then iron for Rome and Anglo-America because steel coins have now replaced monetary PM's. Then
the clay mixed with iron could represent digital currency worth even less than
steel or iron. We are slowly becoming a cashless society. At the moment we
are iron mixed with clay, we do use iron or steel coinage alongside digital
transactions. The so called elite version of digital money if implemented, they
will be able to take all of ours and control it 100%. No more privacy
whatsoever.
But that was just to set the scene on why to live self reliant. I wanted it to not
be about describing the problem but mainly solutions that are helpful.

It has to be said that these 7 dominant world powers do not include every
dominant world power through out history. But I feel it does include most of
the main ones. Most others if not almost all dominant world powers through
out all history went through these stages of the monetary cycle that ended
badly for them. For example Genghis Kahn's reign went far further than
Alexander the greats. But his dominant world power only lasted a few
generations unlike the 7 main ones I looked at. But even his and subsequent
Khan's went through the monetary cycle, there is a famous quote that has
survived until this day. "The great Khan (Chinese ruler), causes the bark of
trees, made into something like paper, to pass for money all over his
country." It's well worth repeating for emphasis that many things have been
used as currency but only gold and silver are money in and of themselves.
So we have just looked at seven of the dominant world powers of history. As I
just said there have been many many more dominant world powers and less
dominant world powers. It is a fascinating subject to study, if you want to look
at monetary history. Even in modern times the cycle has repeated in lesser
world powers like Wiemar Germany then Argentina a few times recently, then
Zimbabwe and at the time of writing its happening in Iran, to name just a few.
I know some have disagreed on comparisons made to Wiemar Germany and
Zimbabwe for reasons relating to functional debt markets (Wiemar) and the
fact that Mugabe is absolutely nuts- granted our central planning overlords
are crazy too- but they are far more subtle. The moment that major
devaluation occurs in the West, it's game over for them.
So there are always differences every time this cycle has repeated. It will be
different in many ways this time around but its the same cycle repeating that
has always repeated. From money to currency and back again.
GOLD WARS BY FERDINAND LIPS, first of all what a great name. But seriously
this is a must read book for those interested in monetary history and this
monetary cycle that repeats through history. A few words on Ferdinand Lips: He was a renowned Swiss Banker born in 1931, and established his own bank
in Switzerland, Bank Lips AG (Bank Lips Silver) in 1987. He openly says in his
book when he says gold he means gold and silver. Aside from banking, he
was also active in finance and a respected authority on gold and silver
markets. His long experience gives great weight and value to the insight he
provides in Gold Wars. He was also a vocal critic of the sale of Swiss Gold
Reserves, and dedicated a chapter on this matter in the book. In his foreword
of the book, he says about himself:
“I am not an economist. For most of my fifty professional years, I was a
practicing banker. The experience gained and thirty years of studying history,
particularly monetary history, led me to recognize that the present monetary
system is in disarray. It is a slap in the face of law and order, civilization and
civility; but, most importantly, it is a threat to our freedom. Let us hope it will
not last much longer, as the same monetary cycle repeats.”
Gold Wars is a great source of information on monetary history, the part of
monetary history that is no longer taught, the part that is overlooked. Very
few if any universities offer this information, there has been an effort to keep
this history hushed up. In the book he answers the question that so many are
now asking, what is money? He discusses money at a high level, perhaps in
some ways at a beyond PhD level, since many PhD’s in economics frankly
don’t truly seem to understand the difference between money and currency
themselves.
In Gold Wars, Ferdinand Lips reveals how the world economy has swayed
from money which is only gold and silver, over to currency which is anything
else used as a medium of exchange. Summary of gold wars.......
Gold in History
Ancient Civilizations Rose and Prospered With Gold and Silver then went over
to currency and back again.
The rise and fall of ancient civilizations goes back to the stability of gold and
silver in their markets. Cultures flourished on wealth and stability – this
prosperity was secured by sound money - gold and silver. The Egyptians were
the first ancient civilization to mint and use gold and silver as a currency,
then ancient Assyria, Babylon and Medo-Persia went from money over to
currency, followed by the Greeks, and the Romans repeated this cycle several
times during their dominance. After a prosperous and stable economy under
gold and silver sound money, the monetary cycle repeats and develops into
the first Keynesians, tempted to cheat one another with weights, diluting the
coins, ultimately debasing it – which Lips says can explain why they suffered
from long periods of instability and civil war, then the cycle repeats. Many
factors could be blamed for the fall of these Empires, but the monetary cycle
repeating was certainly a critical one.
It is important to point out that silver and gold have been monies dating back
more than 5,000 years. I think they were being used as money even before
that but there is no proof. The very same monetary cycle going from money
over to currency and back again has repeated time and again and is
repeating again in our time early in the 21st century. It is also worth noting
that every inconvertible fiat (paper currency) monetary system in history so
far has collapsed each time the monetary cycle has repeated, with each
“monetary unit” returning to its intrinsic value of zero. It could be argued that
not all of them went completely to zero, but as a practical matter the
devaluations were so harsh that the currency was abandoned by the
population as a medium of exchange—effectively making it worthless. Yes
you could burn it or maybe stuff your mattress as insulation but to all intense
and purpose these paper notes are worthless.
The average fiat monetary system has lasted roughly 35 years, which
ironically, is seldom if ever pointed out in academia. Is it just coincidence that
an economic event (hyperinflation) came about at nearly the same time that
fiat money came into existence? Hyperinflationary episodes have occurred
more than 50 times in the 20th century alone. Various economists have
answered the question regarding why silver and gold, as opposed to other
commodities, are considered money. A. J. Turgot, Richard Cantillon,Carl
Menger, and others have pointed out that it is because these two precious
metals have the most marketability or salability. Aristotle named the
attributes that the most ideal (commodity) money should have. It should be
scarce, durable, malleable, divisible, homogenous, transportable (having a
high value to weight ratio) and be a store of value of long periods of time.
These virtues almost perfectly describe silver and Fiat simply means a
currency that derives its value from government regulation or law, such as
paper currency. Currency may well fit some other requirements, but has
never been a store of value over long time periods, only gold and silver have.
Turgot argues further that, while almost all commodities may more or less
conveniently serve as money, gold and silver have been chosen as the
‘universal money’ because they possess in the greatest degree the various
physical properties which peculiarly suit them to that role. Joseph Salerno,
says a similar statement as do many other respected monetary historians. I
will briefly summarize just how intertwined silver and money have been
throughout history, which is necessary to understand because silver has two
demand drivers. The first is the industrial demand component, which I break
down between fabrication (jewelry, photography, and silverware) and that for
industrial uses (electronics, batteries, brazing alloys and solders,
photovoltaic, 10,000 other uses etc.) The second is investment or monetary
demand. Investment demand hit a record in 2013 and looks to do the same
again in 2014. Investment demand should continue to set new records nearly
every year until the current fiat money house of cards implodes or a
worldwide monetary reset occurs, as soon as this next decade to 2024 or 25.
This is for several reasons, including but not limited to:
Investment demand of silver in both China and India continued at an
extremely robust pace last few years and looks set to at least continue or go
up. India in particular really drove investment demand in 2013. As of the end
of December 2013, net silver imports stood at a whopping 7.063 tons for the
year, an increase of well over 15% year-on-year. This puts India on track to
import 27%-28% of world mine production (assuming total world mine
production increased to 842m oz. in 2013). American Silver Eagle Sales set
another record high in 2013, reaching the 2012 threshold with a month left in
the year. Remember this is immaterial but gives us insight into what the
smart money is doing.
At some point in the next five to ten years, the price of silver is destined to
reach tripledigit prices, or over 6 times greater than the present ($14-$16oz
in 2014). With silver, the potential is exceptionally strong because of required
industrial consumption, which will greatly augment the coming effects of
significantly higher investment or monetary demand. This means the price of
silver should rise sharply as total demand far outstrips supply. But its value
shouldn’t be looked at in currency terms, rather in terms relative to other
commodities.
To fully grasp the concept of the origination of money, it is necessary to start
at the beginning, answering such questions as: What is money? Why is
money necessary? What is its function? Who chooses what constitutes
money? And lastly, what makes a chosen monetary system sound or
unsound? These are key question that are answered in this book.
So in review of Ancient Monetary History of Silver – from 3,400 B.C. - 1792
Money is a medium of exchange and a unit in which prices are expressed but
it is not, as many people think, a measure of value. This is because exchange
is an action that expresses preferences; that is, he who acquires a good or
service values it more highly than what he pays for it. Market participants use
cardinal numbers to measure such things like space, time, weight, and mass.
This begs the question as to what technical or economic need there could
ever be for a measure of value, given its subjective nature. If one were to
assume money could measure value, meaning the price paid for a good
represents that good’s cardinal value, this should then be applicable to
money if it were a measure of value. And this brings up the question, “What
is the value of this measure of value?”
The Origin of Money
Starting from the most basic monetary system, a barter economy is when a
person engages in direct exchange with another individual, lacking a
standard unit of account. This problem is solved by the development and
usage of indirect exchange.
Naturally problems arise when exchanging one good for another in a barter
economy, because the market is constantly changing due to an individual’s
ever-changing subjective values of needs and wants. Furthermore, exchanges
only take place if each party in the proposed transaction has a direct,
personal need for the good he/she receives in exchange and views the good
he/she receives in exchange as more valuable than what they have to give
away for it.
What makes a monetary system sound? A clear and concise answer is, “any
monetary system that a government is not involved with.” A sound monetary
system inherently rises in a market economy, with checks and balances that
prevent monetary inflation. A more detailed answer, which history has shown
us time and time again, is that the market would choose a commodity
money, notably gold and/or silver. This shouldn’t be confused with the
monetary system of the U.S. during the period of 1913 to 1971 as this wasn’t
a true gold standard. As many suspect the Americans of printing more dollars
than they held gold and silver.
One of the great things with the presence of a 100%-backed commodity
standard is that such a standard is synonymous with freedom. The inherent
nature of government is to usurp as much power as it can in an economy, or
said differently, attempt to control all or as many as possible factors of
production, the most important being monopoly control of the currency,
communication, and transportation.
The irony here is that government and central banks are the cause of the
boombust cycle (business cycle) by distorting interest rates, which relay
important information to every individual, instead of letting the market
determine interest rates. A common fallacy is that modern day business
cycles (1913-present) are commonplace and, as Alan Greenspan would say,
are “Economic Phenomena.” Interest rates relay such information as to what
part of the structure of production capital will be most efficiently allocated. It
reflects society’s savings/investment-to consumption preference and acts as
a signaling mechanism to capitalists as to whether they should invest capital
to maximize accounting profits. Artificially manipulating interest rates
downward, combined with fractional reserve banking, induces an artificial
economic boom in the first place, which is followed by a natural bust, or
cleansing, of the imbalances from the economy created by the artificial
boom.
Looking at Turgot’s contribution to monetary theory—more specifically, how
exactly the market adapts and has adapted silver and gold as the ideal
money—the following quote from Turgot is ingenious, with an obviously deep
understanding on the origins of money:
“Individual actions generate a spontaneous and self-reinforcing market
process whereby silver and gold evolve into money. Market participants,
realizing this, will become increasingly eager to acquire and hold stocks of
these metals for the purpose of being used in exchange at a later date. This
demand for silver and gold and the corresponding market values of each will
be augmented by this development, further enhancing their usefulness as a
medium of exchange. Once this is accomplished and universally becomes
the preferred medium of exchange and traded against every other good in
the market, the metal weights become the standard unit in which all market
values or prices are expressed.”
Sadly, in order to have a natural money circulate as the predominate medium
of exchange, private property rights must at all times be acknowledged and
protected! To the degree that private property rights aren’t acknowledged,
the money that comes into use is forced money, a clear violation of private
property rights. Forced money therefore has one feature—it owes its
existence to violations of private property rights, which violates free market
principles. In reality (as opposed to theoretically), there is nothing in the
middle of capitalism and socialism, thus if government has monopoly control
of the mint, it is anything but free market capitalism, and sadly, this is what
exists in every major economy today.
Just how pronounced has silver’s monetary role has been throughout history?
The very word for silver is money in many languages. In Italian, Spanish, and
French, the words can be interchanged. In Hebrew, the word kesepph means both silver and money. Even in Early-American slang, the word silver was
often used to signify payment:
“Grease my palm with silver!” To be precise, among more than 250 million
people in over 50 countries, the word for money is identical to the word for
silver. Many Europeans refer to both silver and money as “argent,” while
Spanish-speaking people the world over use “plata” to mean silver, money,
or both.
Another greatly misunderstood concept is that of deflation and how
mainstream media and market pundits exhibit such great disdain for it. It
could be because central bankers do the same, but history has shown that
economic forecasts by members of the Federal Reserve Open Market
Committee are generally inaccurate and always inaccurate for medium to
long periods of time. These forecasts aren’t just wrong, but, at times, so
significantly inaccurate as to be almost comedic when looked back upon. My
wife grew up in Japan during many years of deflation. This is referred to as
Japans lost decade/s. For the people living in Japan it was wonderful seeing
your currency go up in value and be able to buy more and more each passing
year.
Silver’s Use as Money: a Brief History
While it is unclear who the first people to mine silver were, we can trace
silver mining and silver used as money back to 3400 BC in Mesopotamia
(although some argue that silver mining began before that, in Hungary,
closer to 4000 BC). This was also beginning of writing, and correspondingly,
journal entries. These entries were for local trade, which had various
standards as a unit of account, such as silver and animals, amongst several
other goods, illustrating that even 5,000 years ago, the market chose silver
as a medium of exchange. As identified at the start of this chapter with the
first ever recorded financial transaction when Abraham paid for his wifes
place of rest with silver money. While this money system was very primitive
and remained so until coinage came about, it didn’t stop other societies from
using silver as a monetary unit nor did it impede the advancement of the
monetary system.
The first instance of bimetallism, actually the use of three metals (gold, silver
and copper), began 1,400 years later (2000 BC) in Egypt. The monetary
system evolved and had definitive weights for trade purposes as well as
exchange rates against one another. The unit of weight(deben) and monetary
unit (sha) were the following:
· A deben of gold was worth 12 shas
· A deben of silver was worth 6 shas
. A deben of copper was worth 3 shas
· 1 deben = 7.5 grams of gold, 15 grams of silver, or 75 grams bronze/copper
What a wonderful simple fair monetary system. Easy to understand
and work out. Why does it need to be more complicated than that? I
think this could be a fair monetary system today, with these relative
values used in physical form as well as using the blockchain
technology for backed crypo currency. There could be the main
money used to compete with bitcoin et al called the silvergram,
which would be worth half a goldgram and ten times a coppergram.
Given the relative supply demand fundamentals of the three
monetary metals today. Most of the time the world would just use
silvergrams either digitaly changing ownership of serial numbersof
silver grams in a vault, for long transactions or physical grams of
silver for hand to hand transactions. See later in the book for more
on the new silvergram monetary system.
Amazingly, by today’s standards the gold-to-silver ratio was 2:1, followed by
copper worth around 10% as much again. This advancement of the monetary
system continued, and in 1500 BC, monetary units of the same melts had
varying weights. The Hittites reverted to a monometallic standard, using
silver as a medium of exchange. It is also important to point out that this was
prior to the advent of coinage, which came 800 years later.
· Shekel ~ 8.41 grams of silver
· Stater ~ 16.82 grams of silver
· Mina ~ 500 grams of silver, or 15.5 ounces
· Talent ~ 30 kilograms, or 933 ounces
The Lydian System
An immense advancement in the monetary system was made by the Lydians,
who were the first to utilize coinage (silver and gold) for monetary purposes,
which first occurred around 700 BC. The Lydians were the first to not only
coin money but to also develop the first system of coins, initially making
them from gold and silver alloys. They were also the first to establish retail
shops. Some argue it was King Alyattes who developed and then first coined
the stater, while others argue it was King Gyges who first circulated this
coinage. These small oval nuggets circulated throughout the East. As you can see, the
oval nuggets were not 100% homogenous, so technically could not be called
coinage. King Gyges ruled from 690 to 657 BC, while King Alyattes ruled from
610 to 550 BC. Historians tend to link King Gyges with the first coinage and
system of coins. These coins were actually not silver or gold, but rather an
alloy of the two. Later, the son of King Gyges, King Croesus, greatly improved
the smelting technique of his predecessor via separating silver and gold from
the electrum. While either King Alyattes or King Gyges came up with the first
coinage and system of coins, King Croesus originated the first bimetallic
system of coins, with an exchange rate between the two, as follows:
· 1 gold stater = 8.17 grams of gold
· 1 silver stater = 10.89 grams of silver
· 1 gold stater = 10 silver staters
· (8.17) x (1) = (10.89) x (10) OR
· Gold-to-silver ratio = (108.90/8.17) = 13.33
The Lydian system spread like wildfire through the East, then to Greece and
all of Mediterranean Europe. Greece was able to develop its economy thanks
to silver-lead veins running south of the city. The first mines exploited easily-
obtained surface veins, which is silver closest to the earth’s surface.
This was the start of the first large-scale mining industry, which included
more advanced ore refining. As a result, Athens sported a strong currency
and advanced trade, but it then made one fatal flaw—initiating the
Peloponnesian War.
Athens society and political philosophy were more capitalistic than its
neighboring city, Sparta. Sparta had almost the exact opposite philosophy,
one that would be regarded as Socialist in today’s world. Athens instigated
the war in 429 BC and to their detriment did not foresee it lasting 27 years.
This brings us to the first instance of government manipulating/debasing its
currency. In 407 BC, the government debased its currency by adding copper
to the coinage, therefore causing a face value that was less than the value of
its metal content. Another devaluation occurred just two years later in 405 BC. During the biblical times of Jesus, notably the betrayal by Judas, we know
Judas was paid 30 silver “pieces” for this betrayal. It is unclear as to what
weight of silver these 30 pieces equated.
“Then one of the twelve, who was named Judas Iscariot, went to the chief
priests and said, ‘What will you give me, if I give him up to you?’ And the
price was fixed at thirty bits of silver.” Matthew 26:14-15
There is evidence of two different monetary units (denier and shekel) as well
as varying weights of both during this time. At the creation of the denier, it
initially weighed 4.51 grams of silver but the silver coin created in 212 BC
became devalued and by 140BC, weighed 3.96 grams of silver. But although
the evidence that Judas was paid in “shekels” is much stronger, therein lies
another problem. At the time, there were different variants of shekels,
“biblical shekels,” “Tyrian shekels,” and the basic “shekel.”
· 30 denier/denarii x 3.96 grams or .127 troy ounces = 3.82 ounces
· 30 biblical shekels x 6 grams, or .193 troy ounces = almost 5.79 ounces
· 30 shekels x 11 grams, or .35 troy ounces = 330 grams or 10.61 ounces
· 30 Tyrian shekels x 14 grams, or .45 troy ounces = 420 grams or 13.50
ounces
The Tyrian shekel was used over the time period in Jerusalem and they were
specifically referenced in the book of Matthew. Due to the fact that a shekel
of a specific weight was mentioned (Tyrians) in the book of Matthew (21:12)
and it was the medium of exchange used to pay temple tax in Jerusalem,
Judas’ payment for betraying Jesus was most likely approximately 13.50
ounces of silver.
However, this is a bit confusing, given that the biblical shekel was 6 grams,
which naturally sounds as if that were the shekel referred to in the Bible.
When the first shekel was coined in 600 BC it weighed almost 11 grams
(10.89). Further complicating the issue is the denier/denarii, which is also
referenced in the Gospel of John as well Luke (10:25).
The Roman monetary system fell apart when the denier as a weight of silver
was reduced as silver coins were recast over and over again with each
emperor. Over the period 158 AD to 284 AD, Rome had 20 different emperors,
most of whom debased its currency. Starting with Nero in 158-167 AD, the
weight of silver in a coin was 2.19 grams. Then in 282-284 AD under Emperor
Carus, the weight of coin dropped to 7.47 grams and only included .04 grams
of silver. In other words, the silver content in each monetary unit was less
than 1/54 of what it was 115 years earlier. Year Emperor Silver Weight in Coin Depreciation 156-167 Nero 2.19 167-170
Marcus Aurelius 1.57 -28.31% 191-192 Commode 0.92 -41.40 212-217
Septimius Severus 1.16 26.09% 224-227 Caracalla 0.88 -24.14% 235-238
Maximanus I 0.74 -15.91% 238-244 Gordian 0.61 -17.57% 244-249 Phillip
0.87 42.62% 261-268 Gallian 0.4 -54.02% 268-270 Claude 0.26 -35.00% 282-
284 Carus 0.04 -84.62%
The Medieval Period
This period primarily involves Charlemagne, who became king of Gaul and
Germania in 771, after the death of his brother. Charlemagne went on to
expand his empire by defeating the Saxons to the north, followed by Austria
and then Northern Italy. Charlemagne decided to replace the previous
worthless currency with a new one, a currency strictly minted in silver. The
names of the monetary units were nearly the same, the basic unit being
called the Roman denarius. This weighed 1.70 grams, with the next monetary
unit being the obol, weighing 0.85 grams. A popular unit was the penny,
being worth 12 denarii, as well as the pound, worth 240 denarii. This
monetary system was on a monometallic standard (silver), partly due to the
fact it was the only one relatively plentiful among the Franks. Charlemagne is
important in monetary history because his change to monetary policy would
be influential throughout Europe for many decades.
This monometallic system lasted for four centuries. In Venice 400 years later,
the first “sequins” were minted. Sequins were first called ducats, which
weighed 3.60 grams of gold (3.495 grams of fine gold), thereby replacing the
monetary system Charlemagne Cyrille Jubert, Silver Throughout History, had
put in place. Venetian bankers imposed an exchange rate on gold
(manipulation) in order to control its inflows.
In 1275, the prevailing gold-to-silver ratio was 8, increasing to 15 just 50
years later. This along with trade with the Mongols and what was essentially a
monopoly on gold mines pushed Europe onto a monometallic monetary
system, but this time using gold. The gold-to-silver ratio was reduced as the
emperor of Mali undertook a journey to Mecca, bringing with him 60,000+
men and more than 10,000 slaves. In every city this journey took them
through, they paid generously in gold for the needs of all the journeymen.
Due to the influx of gold, Venice reestablished the gold-to-silver ratio, from 15
to 1, to 9 to 1 by 1345. Florentine bankers were ruined by the gold manipulation of the Venetians.
Their fortune prior to the manipulation was primarily in silver and the
increase from 8 to 15 per Gresham’s Law drove silver out of circulation. This
caused 60% of the silver to be driven out of circulation by 1345, and
fractional reserve banking (multiple claims on one monetary unit in specie) or
lending out more money than it actually held in deposits caused a financial
meltdown. This crisis, also known as the “systemic crash of 1345,” led to a
substantial spike of inflation.
The results were extreme poverty and famine among the masses, the recipe
for a wave of epidemics due to the immune system becoming substantially
weakened. It was known as the Black Plague. In five years, it wiped out
roughly 40% of the total European population. This, along with the Hundred
Years’ War, resulted in a century of silver shortages and economic stagnation,
or in other words, set back economic progress for more than a century.
China: The birthplace of paper money
The first use of pseudo-fiat money was 2,000 years ago by the Chinese
Emperor Wu-ti, as he was caught up in a series of wars and needed financing
to fund his battles. He tried numerous money substitutes, most of which were
very odd, with one of these being deerskin money, which was exactly like it
sounds. This money at the time was highly ritualistic. While this use of
deerskin money was successful in financing Wu-ti’s campaigns, it didn’t last
very long. To get an idea just how valuable this was in society, a deerskin
monetary unit was equivalent to 480 ounces of silver! This was not the first
time animal skins were used as currency, that was as shown earlier in this
chapter, in ancient Babylon when both animal skins and clay tablets were
marked with values of silver. But it could be argued that animal skins were
the first forms of paper currency.
The Tang Dynasty
During the Tang Dynasty (618-906) in China, paper money widely circulated
and “religious paper” that corresponded to silver, gold, copper, and silk was
not money that circulated in commerce, but was just religious offerings.
Copper coins were the primary circulating medium of exchange and for brief
intervals of time, silk rolls were used in exchange for medium- to large-sized
transactions. Gradually, silver gained preference as the common monetary
unit among the people. Three types of credit institutions existed, one being a
money shop, which was a concept similar to a bank.
By 750, fei-ch’ien, or “flying money,” illustrated the advancement of the
Chinese monetary system. Today it would be considered an instrument used
in credit exchange, similar to a credit card transaction. It could be argued that
this is comparable to a warehouse receipt used in “classical” deposit banking, as it was a negotiable draft note.
It became commonplace to keep metal on deposit somewhere and draw
notes against it (known as debiting the metal on account). It is important to
note here that this system arose from the market, not government.
By 812, flying money came to an end as government prohibited private fei-
ch’ien as the fee for using fei-ch’ien, similar to credit card fees today (fees
were raised from 3% to 10%).
“Chinese histories attribute the origin of ch’ao-pi, or paper money, to the fei-
ch’ien ‘flying money,’ of the Tang period. The ‘flying money,’ also known as
pein-huan, ‘credit exchange,’ was essentially a draft to transmit funds to
distant places; hence it may be considered a credit instrument but not
money. This history of paper money and that of other credit instruments,
however, is so closely woven together that the ‘flying money’ forms a logical
starting point for our account.”
Paper money was used in Szechwan in 1011, which was called Chia-Tzu.
There were problems from the start as the three most prominent money and
credit institutions (pawnshop, co-op loan society, and money shops) had
control over issued notes, either shortchanging their customers on deposits
or even completely ruining them. It only took 11 years from the start of this
first paper money experiment until it collapsed due to a loss in confidence,
causing the government to close the private note shops. There were and still
are a myriad of contradicting explanations regarding why this system
collapsed.
The Song (S’ung) Dynasty
Not too long following the first fiat collapse, the Chinese again experimented
with fiat money, with the Song (S’ung) dynasty being the second to issue
paper money (1024), which was called Chiao-Tzu. As is typical, the prevailing
government began abusing this new concept. The notes in circulation did
have an exchange rate against gold, silver, and silk, however, convertibility
was prohibited. Initially, all notes would be redeemed after three years and
replaced by new notes at a 3% service charge. This, however, began to be
abused as the government stopped this practice and instead just printed
more and more notes, inflating the inconvertible fiat paper money. Shen Kuo,
the minister of finance, explained to the emperor how the economy prospers
with more money in circulation in 1077: “The Utility of money derives from
circulation and loan-making. A village of ten households may have 100,000
coins. If the cash is stored in the household of one individual, even after a
century, the sum remains 100,000. If the coins are circulated through
business transactions so that every individual of the ten households can
enjoy the utility of the 100,000 coins, then the utility will amount to that of 1,000,000 cash. If circulation continues without stop, the utility of the cash
will be beyond enumeration.” His logic is astoundingly ridiculous and quite
comical. Inflation at that time took a bit longer to be recognized as the S’ung
dynasty was cautious at first and only issued small amounts, such that the
chiao-tzu held its value for seven decades. Inflation,nonetheless, became a
big problem around 1085-1090. For a time, fiat money and sound money both
circulated, but then the government started demanding taxes be paid, at
least in part, by inconvertible fiat paper money.
The government also introduced various laws, which essentially forced
individuals to use fiat in a plethora of situations. Less than a century later,
the inevitable happened and inflation became an issue. The dynasty was
fighting the Mongols (the Yuan dynasty) and the increasing cost of fighting
the war made inflation very apparent. The S’ung dynasty eventually lost the
war early in the 13th century (1217). From the start in 1106 through 1217,
several other fiat systems were tried, but they failed, due to lack of faith from
society as a whole. The Chin Tartars gained control of the Northern China
Empire, and the S’ung dynasty continued to reign over the empire, which
makes up modern-day Southern China. The Chin brought back paper money
in the form of Chiao-ch’ao in 1153. The Chin currency maintained its
purchasing power for 40 years because the currency was believed to be fully
backed by silver and gold as the Chin emperor proclaimed; however, even
while he was saying such things, all the precious metals that backed the
currency were either redeemed or sold.
Merchants relied heavily on silver to sustain commerce, despite the
government trying to do everything in its power to prop up inconvertible fiat
paper money by Yang, prohibiting the hoarding of metals, imposing a
maximum drawdown on silver and gold from the imperial treasury, and
eventually inflating the money supply to finance the war.
Coming back to the S’ung dynasty in Southern China, the old S’ung leaders
again took charge and introduced paper money after this failed the first time.
This time it was in the form of Hui-Tzu, to circulate in everyday commerce.
The society reluctantly accepted the new paper money because the collapse
of the S’ung currency in the north had been just a few years prior.
Like the paper monies in China before it, the hui-tzu eventually was worth its
intrinsic value of zero. For the first 50 years, this paper money was more or
less stable— that is, until the government’s management of the currency
became reckless. This paper money hoax that began in China is in practice in
EVERY other government throughout history. More notes came into circulation
and the purchasing power declined, followed by an attempt in 1204 (after the
currency had lost roughly 20%-22% of its purchasing power) to increase
confidence in the monetary unit by calling the newly issued paper note a gold, silver, and cash communicating medium.” Hu Zhiyu criticized the
currency, declaring it worthless and stating that only precious metals backing
gave paper value . .. in other words, blaming the inconvertibility. He ascribed
a great analogy between paper and precious metals as paper money being
the child, which is dependent on the mother, precious metals.
The Yuan Dynasty
The Yuan dynasty fared better with fiat money relative to the S’ung dynasty,
due to the actions of Kublai Khan, who followed the recommendation of Yeh-lü
Ch’u-ts’ai, his most prognostic advisor, and instituted a conservative ratio of
paper to backing by silver. Further inspiring confidence in the Chung-t’ung
currency, in 1268 the government established the Equitable Ratio of
Treasuries. These bureaus served only as a place where convertibility of
paper money to silver and gold was processed.
At this point it could be stated that the Chinese had learned from their
failures experimenting with paper fiat money. It was clear the government
learned something, albeit not in full, from the mistakes made in monetary
policy from the recent past, as Minister Liu Hsuan said the following: “If there
was the slightest impediment in the flow of paper money, the authorities
would unload silver and accept paper as payment for it. If any loss of popular
confidence was feared, then not a cash’s worth of the accumulated reserves
of silver and gold in the province concerned would be moved elsewhere. At
that time, still very little paper money was issued without a reserve to back it,
and it was therefore easy to control . . . For seventeen or eighteen years the
value of the paper money did not fluctuate.” Liu accompanied this by also
warning of the dangerous risks in inflating the money supply and stressed the
necessity of confidence in a currency, which was brought about by precious
metal backing and/or convertibility. The economy improved at first, most
notably in agriculture, water irrigation, encouraged silk production, and a vast
improvement in monetary affairs, while he made paper money even more
widespread but backed the money by specie. This led to more active
commerce with the construction of roads, improved canals, and a postal
system.
This, however, got the economy into trouble after some time, due to
excessive spending on public works programs that persisted after Khan’s
reign. His successors fared no better and began engaging in currency
manipulation, higher taxation, and several other economic shenanigans that
were both unpopular and unsuccessful.
Peasant uprisings began to occur after the government tried to exploit them
in various manners, and a series of over 30 very harsh winters caused the
existing economic problems to worsen. The Yuan currency morphed into a fiat currency due to the vast expenditures on public works programs, and the
Mongols undertook numerous unsuccessful military and naval excursions.
It wasn’t one single event but rather several that caused the dynasty to go
broke. Several incredibly large naval fleets were destroyed by typhoons, and
countless other small events put pressure on the system. Price inflation took
off due to massive printing of inconvertible and unbacked paper money,
causing society at large to accumulate precious metals. Minister Liu Hsuan
was very outspoken in his opposition to the printing of paper money.
The transition from the Yuan dynasty to the Ming dynasty was a result of the
peasant uprisings combined with the harsh winters and other natural
disasters. The Ming dynasty arose from the collapse of the Yuan dynasty
caused by wars among the Mongol imperial heirs. In 1368, Zhu Yuanzhang
became the emperor; he was a Chinese peasant and former monk turned
rebel army leader.
The Ming Dynasty
The Ming dynasty brought back paper money, purportedly because it lacked
the wealth to instill a sound monetary unit. The Ming dynasty managed to
inflate the money supply to such a degree that over a 75-year period (1375-
1450), the purchasing power of the Ta-Ming pao-ch’ao was reduced to
1/1,000 of its original strength by the end of this period, relative to the start.
In 1375, one ounce of silver was worth one string of paper. By 1450, one
ounce of silver was worth 1,000 strings of paper29. The Chinese finally had
enough and before the 16th century, silver was far and away the most
popular medium of exchange. By the end of the Ming dynasty, the people
rejected all attempts by the government to bring back paper money.
Silver Fever in Asia
Lastly, the Manchu dynasty (1645-1911) flourished as it became even more
liberal (in the classical sense) than the West, with much more freedom from
state interference. Silver ingots overwhelmingly dominated exchange in both
domestic and world trade as well as in everyday use in commerce. It could be
stated that China had “silver fever” during this time as well, accounting for a
whopping 25% of world population. It is important to note that during this
experiments with a “pseudo-fiat” monetary system, the Chinese had
eventually realized that such a monetary system would not work and would
inevitably fail. In this sense, economic knowledge has not only been lost, but
has actually regressed!
At this point in history, the Europeans realized the Chinese civilization was
advanced relative to theirs, and had little desire for most European goods; however, the Europeans desired Chinese products, most notably, silk. Gold
had no real monetary value in China, so a significant amount of trade with
the Chinese was done using silver as the primary monetary unit. Silver
became much more highly valued in the Eastern world (China and Japan) and,
because of the combined populations, had an uncanny ability to absorb the
metal. From the 15th through the 17th centuries, the gold-to-silver ratio in
China averaged 6-6.5:1 and roughly the same in Japan. Starting in the 17th
century, the gold-to-silver ratio began to climb in the Eastern world. By the
mid-17th century, the gold-to-silver ratio had increased to 13-14:1.
It has been said the value of silver in real terms peaked over the period 1450-
1489 as the Hundred Years’ War came to an end. Since silver was in short
supply during this period, the government once again resorted to debasing its
currency. This backfired, driving individuals to hoard silver, naturally
exacerbating the shortage.
The Renaissance and Discovery of the Americas. This period was marked by
several innovations, notably in navigational instruments (compasses, maps,
etc.) and in mining. In 1451, new methods were discovered for the extraction
of silver (increasing the recovery rates) by adding mercury, salt, and copper
sulfate. Furthermore, new hydraulic processes were implemented to “de-
water” underground mines.
These two occurrences allowed for increased extraction of silver from both
copper and silver ore. Mining became a more viable industry, which attracted
many financiers to invest in both mining and refining. This increased
investment and superior mining methods soon resolved the silver shortage
issue.
This brings us to a major currency crisis in England known as “The Great
Debasement,” as Henry VIII debased the English coinage by first re-smelting
the coins so they contained less and less silver. The market soon realized that
this was a 75% depreciation. Thus, as a consequence, rampant inflation
occurred in short order. The British currency quickly reversed course when
Elizabeth the 1st took the throne and named her financial advisor, Sir Thomas
Gresham. This is where the fairly popular term “Gresham’s Law” originated
among free market economists. It can be explained in different ways, but
broadly speaking, it means “bad money drives out good.” In those days, it
meant that if two currencies are in circulation, the undervalued one will be
hoarded/exported and driven out of circulation while the other will be used in
everyday transactions. Seigniorage, the right to coin money, was considered
a source of income; thus, newly minted coins were overvalued relative to
their weight in silver. Each new minting of a given metal resulted in inflation
or confirmed Gresham’s Law and was driven out of circulation. We then move to the discovery of “the Americas,” in particular, the West
Indies and the Caribbean, as Christopher Columbus and the conquistadors
were looking for a new route to India. Initially, only gold was shipped backed
to Spain from South America. It wasn’t until more than five decades later that
silver mines were discovered, bringing with them, unprecedented wealth.
The first major discovery was made in modern-day Bolivia, part of Peru at the
time. The Potosi Mines were discovered in 1545, being the first large silver
mines discovered in the “New World.” These mines were in the Andes
Mountains and contained very pure and high-grade silver ore. During the first
20 years of mining at Potosi, 60 tons were produced, followed by an average
annual production of 240 tons per year for the next 115 years. This amounted
to 170,000,000 oz. of silver over the life of the Potosi Mines. All this silver has
now been consumed, as of the 21st century.
Production after 1680 saw a sharp drop off, because once the extremely
highgrade surface veins were fully exploited, grade and prevalence declined
at depth. Silver only occurs near the earths crust, once mining gets
under that there is no more silver to be found, only gold is still
found. Although this knowledge wasn’t known at the time, so it naturally was
surprising to the miners. During the period of mining at Potosi, other smaller
scale deposits were discovered both in Peru and Bolivia. However, the next
big mines would be found in Mexico. The silver mines in Mexico were
discovered and exploited relatively soon after that in Bolivia, and by 1650,
silver production in Mexico exceeded that of Peru and Bolivia combined. Prior
to the significant innovation in silver mining, exploration, extraction,
recoveries, and refining developed during the 20th century, Mexico’s peak
production came in 1780, totaling 22,000,000 oz. Today, Mexico produces
roughly 120,000,000 oz.
This too will see a significant increase a decade from now. This took place
during the reign of Charles V, who, along with his successors, received the Royal Fifth,” or 20%, of all the gold and silver extracted. Added to this was
the seigniorage tax for producing money. Naturally, these taxes became too
burdensome and many evaded them by smuggling, shipping, and selling
metal to Asia, among other things.
The “Royal Fifth” was changed to the “Royal Tenth” after the Spanish realized
what was actually happening. Over time and around the world, the price of
silver fell, due to the vast increases in supply from the Americas. This can be
seen through the increase in the gold-to-silver ratio, depicted in the chart
below. For example, in England, wages increased to 4.1 grams from 3.4
grams over the period 1600-1650 from 1550-1599. Each 50-year period, the
same thing happened through 1800. Wages increased to 5.6 grams, 7.0
grams, and then to 8.3 grams by 1800.
GSR Over History
Menes, 3200 B.C. 2.5
Egypt, 2700 B.C. 9
Mesopotamia, 2700 B.C. 6
Egypt, 2000 B.C. 2
Egypt, 1000 B.C. 10
King Croseus, Lydia, 550 B.C. 13.33
Persia under Darius 13
Plato, 445 B.C. 12
Xenophon 11.66
Menander 341 B.C. 10
Greece, 333 B.C. 15
Greece, 300 B.C. 10
Rome, 207 B.C. 14.5
Rome, 189 B.C. 10
Rome, Julius Ceasar 40 B.C. 7.5
Rome, Claudius 12.5
Constantine The Great 10.5
Theodosian Code 14.4
Medieval England 11.1
Medieval Italy, 1275-1300 8
Medieval Italy, 1301-1325 15
Medieval Italy, 1326-1345 9
Spain, 1497, Edict of Medina 10.07
China: 1400-1600 6.7
Japan: 1400-1550 4.8
Japan: 1550-1650 9.6
France: 1500-1650 13.9
Germany, 1500 10.05
1600-1620 12.1
1700-1720 15.1
1800-1840 15.3
As the cycle repeats it always repeats in a similar way. Going from money
over to currency creates a false boom, everything looks rosey then comes the
feeling that something isn't right as the currency supply expands more and
more. Then as the cycle repeats all through history from ancient Egypt
through all the dominant world powers right up to the Anglo-American current
dominant world power today, it always repeats in a similar way going from
currency abuse back to money. It always ends badly as the currency
expansion phase comes to an end and usually involves war, riots, civil
disturbances and very hard times for many. In my opinion this time this part
of the cycle as the cycle repeats it will involve all of these. Here in the early
21st century we are in the end phases of the currency expansion part of the
cycle, next comes loss of confidence in the currency con game then things
end badly as the cycle repeats. Now let us look at some examples of the
cycle repeating in more modern monetary history.
Coming soChapter 2
Monetary History modern times.