The History of Paper Money – Part 2: Not Just Noodles
There is little truth to the idea that Marco Polo brought pasta to Italy from the east. There’s another marvel that the book about his travels popularized. It was an idea, a radical one which is perhaps best summarized by the very title of the chapter that discusses it. For in the book of the marvels of the world or as we know it ‘the travels of Marco Polo’, there’s a chapter titled ‘how the great Khan caused the bark of trees, made into something like paper, to pass for money throughout his realm’.
In ancient China, they invented a coinage system, where the coins had holes punched in them. So if you needed to measure out large denominations, you could just run a string through the center of the coins and the particular length of string would hold 100 or a thousand at once. But over time, the economy evolved. Transactions got bigger and merchants found themselves needing tens or hundreds of thousands of coins to complete transactions. And of course a strand of a 1000 of these weighed about 10 pounds already, so it became a real pain in the neck to transport them. So the government started saying; how about we pay you pieces of paper that have the amount of coins we owe you written on them and you can come pick up your coins at the capitol whenever you want your money. And since the government bought a lot of things, these paper slips started being circulated everywhere. Soon, merchants realized that these slips of paper were always good; that they could be turned in at the capitol for however much was written on them whatever they wanted, so heck why do you even go to the trouble of turning them in? Why not just trade the slips of paper to other merchants for their goods.
Thus the merchants began using these promissory notes or essentially government IOUs as money. And then the government caught on and simply started printing up money. So by the time we got the travels of Marco Polo, paper money was widespread, and this idea started to catch on even outside of China, sometimes with little success. Like when Gaykhatu, the corrupt Ilkhanate of the Middle East, tried to introduce paper money after he’d already splurged the Royal money and had his economy collapsed to a cow plague. He basically fell prey to the misconception that simply printing money was literally a way to print money. Needless to say, he was promptly strangled with a bowstring. But sometimes in other places the idea started to take stronger hold, especially Italy.
The Italian city states had already been playing with this idea a little, they were the economic dynamos of Europe, and the first truly great trading cities on the continent since the ancient world. They were also basically always at war, this made carrying around the great heaping piles of cash a wee bit of a danger. So, the merchants came up with a new system, influenced by the tales from China. At first, they began simply issuing promissory notes, basically IOUs. Merchants would get to a new town and stock up on supplies and trade goods, but rather than carrying the cash to pay for them across dangerous country, they would just give the seller an IOU often backed by a very famous or wealthy merchant promising to pay for the goods at a later date. But here’s the trick; to keep anybody from having to haul all of that money around, the merchant wouldn’t ever actually end up paying the seller directly, instead he would just pay a bank in his hometown.
Here’s how it would work – the merchants selling the goods would take the promissory note he got for them to his local bank, which he had access to unlike most of Europe because the crusades had accidentally created modern banking. Why let a little crusade get in the way of a good story about fiscal instruments? So, he would take the note down to the bank and cash it in for slightly less than its face value. Basically the bank was buying the note from him for some amount less than it was worth. Then the bank, which would have branches in other cities would send a rider with a stack of these notes out to whatever specific city those notes had originally come from. When the rider got to the city, he would hand them to the local branch of the bank, and then the local branch would go collect from the merchant who had bought the goods. So the merchant could pay for goods in a far-off location by paying his local bank after-the-fact. A pretty huge step forward for commerce. But what if the bank didn’t have a branch in the merchants’ hometown? Well, then the bank would just sell the promissory note to another bank that did have one there.
So these promissory notes sort of started to take on a value of their own. People started trading these notes, and soon the banks got in on the action and just let you take out notes from the bank itself if you had the deposits to cover it. But this didn’t reach its full form for quite some time. Fast-forward about 300 years and move halfway across the continent to the little island hanging off of Italy side. The year is 1640, the never popular Charles I monarchy is deeply in debt. He had gotten into a tiff with the parliament and basically disbanded it for over a decade. But according to English law, Parliament is the only group allowed to levy taxes. Which you do need when you’re a king and flat broke, but not Charles – no, no, no. He had all sorts of crazy schemes for bringing in money without calling on Parliament, so miffed he was at them. And in 1640 we have one fine example; he just seized all the money in the mint and this is kind of a big deal because it wasn’t his money in the mint. All the merchants and the goldsmiths of London deposited their hard currency at the mint just as a place to store it. So the king just picked up all that cash and declared it to be another one of his ever popular forced loans.
And then he proceeded to also seize all of the East India company’s pepper, just add a strange if somewhat delectable twist to this tale. Needless to say, his head was promptly separated from his body. Which leaves us in the aftermath with a bunch of merchants and goldsmiths. The merchants and goldsmiths got together and the goldsmiths basically said; look, we have these giant vaults for storing all of our gold, if you want to pay us a small amount, you can rent a corner of the vault to put all of your money in.
This rapidly evolved to the goldsmiths paying people small amounts of interest to leave their money with them in exchange for the right to lend it out. This basically made them into banks. And in their capacity as banks, when people would deposit their money, the goldsmiths would basically give the depositor a receipt, which they could turn back in to claim their money. But soon these goldsmiths made a pivotal switch; they changed from making out receipts which could only be redeemed by the person who originally made the deposit, to also offering receipts that could be redeemed by whomever help them. This allowed people to start using their receipts as currency.
Good stuff…keep them coming!
Thanks! Love your blog, just read through it all