The History of Paper Money – Part 3: Barebones Economy

england bank note

In the last episode we got to the ad-hoc unofficial beginnings of paper money. This week, we’ll look at some of the rogues’ gallery that really created the intellectual argument for adopting paper money in some more official way.

When we last left off in England in 1640, the first unofficial banknotes were starting to circulate, but in the early 1660s in Stockholm, the first semi-official banknotes – the first banknotes from what we might think of as a central bank. The first bank notes that really started to replace a hard currency began to appear. But with those banknotes come the problem of unregulated fractional reserve banking. Remember how we mentioned that the goldsmiths of London realized that using banknotes they could actually lend out more money than they had gold or silver to cover? Well, in Stockholm, they really went to town. Soon there were so many banknotes out there that people couldn’t help but notice. And as soon as people noticed, everybody rushed to the bank to get their banknotes turned back into coins which of course they couldn’t do and there goes the Swedish economy.

So clearly there were still some kinks to work out with these new-fangled banknotes. Now let’s hop back to England; one Civil War and half a dozen other wars after Charles I so politely jumpstarted this whole banking thing with that forced loan of his. The year is 1695; the English have just gotten themselves kicked around in the channel by the French. And if we know anything about history, we know that that will never do. So the English established a central bank (the Bank of England) to raise money and to help the government pay to refit the Navy. As part of this, they issued banknotes, but the idea of banknotes and their role in the economy had been a topic of debate in England for a few years. Which leads us to the first of our roguish economic theorists and yes this is his real name Nicholas – {If Jesus Christ had not died for thee thou hadst been damned} Barebone, who for obvious reasons went by the name Nicholas Barbon.

Nicholas Barbon’s father was ‘Praise-God Barebone‘ – yes really; who will surely make an appearance in episodes covering the English Civil War. Nick Barbon started his career as a doctor, getting his degree from the University of Utrecht and joining the Royal College of physicians. But this trade had too much saving people and too little amassing vast quantities of wealth, so Nicholas turned instead to real estate and construction. Luckily he had a break when in 1666, the great fire of London swept through and incinerated about 13,000 homes and left about a sixth of the city homeless. This of course was seen as a great opportunity by Barbon who would rebuild most of London and even very illegally reshape it.

If you’ve ever been to the Western parts of The Strand or Bloomsbury, those areas basically exist because Barbon didn’t listen to any of the restrictions that said that you couldn’t build between London and Westminster. After all as he saw it, that’s where the open land was where easier to build. I mean yeah it’s open because it’s illegal to build their, but what am I going to do? Tear down the houses he just built? They are already built, deal with it. And from there the sky was the limit. Barbon first got into the reputable business of selling fire insurance in a town that had just burnt down. After that he realized that he could invent the mortgage. I mean, I can’t say that he was absolutely, absolutely the first person to really invent the modern mortgage, but he certainly was the first major player to do so in England. He created the National Land Bank and began to issue loans secured by people’s homes or property. He followed that up with a few stints in Parliament, largely to avoid prosecution, and then he retired to write some books. And it’s really the books that we are interested in and the thoughts he put in them – because while I have been joking about his wild and rapacious greed, he was highly intelligent and it’s kind of hard to write him off as evil. All of these things he did actually ended up having positive effect and his writing sort of shows that he knew that.

Insuring people against fire provided him with a guaranteed profit, but also created a great deal more stability for the English economy. Fires were still a major issue, but no longer would they be a massive economic displacement. Instead, everybody would put some money into the pot to bail out whoever lost their home or trade to a fire and he would skim a little from the top, great for the economy. And mortgages, while we might today think of them as the bank’s way of keeping us down, so much of England’s wealth was locked up in real estate that it was a huge drag to the national economy. When people bought a house, that money just stayed locked up in that house. It didn’t circulate through the economy, it didn’t help to finance businesses, it just sat there until somebody (generations) later decided to sell it. But with the idea of the mortgage, the single biggest asset that most people loaned was now freed up to help drive the economy.

Instead of the seller simply getting a pile of cash and the buyer getting an un-spendable house, the mortgage freed up that value. You could now spend your house and live in it too – meaning that that money could circulate through the economy again and again. And Barbon was also of course one of the first people to decouple morality and spending, which totally sounds evil; I admit. But up until this point, a lot of the writing on money was written by the church, basically arguing that everybody lived the simplest life possible. And that’s probably good advice in a lot of ways, but it doesn’t make for a dynamic economy. Barbon argued for fashion and innovation because they get people to buy new goods before they fully consumed the previous goods, thereby creating demand. And why we’re not to Adam Smith yet, the basic concept that demand creates supply and grows the economy is there in Barbon’s work. But for us, his most important work is probably his arguments against ”Mercantilism”.

Mercantilism was the driving political and economic theory in most of Europe in Barbon’s day. Basically, it’s sort of saw nations as being in a state of perpetual economic war. The goal for any nation was to get as much literal gold and silver as it could for itself and try not to give any to anybody else. In a broader sense, the object was to have your state be self-sustaining; importing as little as possible while exporting as much as you could. Colonies existed to feed the mother country and weren’t allowed to trade with any country other than their colonial power. And when imports had to be made, the goal was to only import raw materials so that they could be turned into more valuable finished goods in your country. While today we see a lot of reasons why every country trying to produce every type of good is a terrible idea.

In some ways mercantilism makes a lot more sense when you think of economies based on commodity money like gold or silver. After all, if your entire economy is based on gold and silver, then your economy can literally only be as big as the amount of gold and silver you have. While many were starting to see this dilemma, Barbon cut to the heart of it. He basically said that even gold and silver don’t have inate value, they are just worth whatever the market values they met. So instead of stockpiling more gold and silver to grow your economy, why don’t you just get rid of gold and silver entirely and move to paper money. But these ideas of Barbons are only the beginning of the intellectual groundwork that will see a world accept slips of paper in exchange for a loaf of bread, a cell phone or a house.

Join us next time and we will witness somebody else, try to put their own theories on paper money into practice on the grandest scale.


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