Original article by Matthias Widner
Bank notes are now an integral part of our everyday lives, but in ancient Europe, money was always made up of coins of precious metal. Until 8th century AD, paper money was unthinkable, not least because of the expensive costs involved in the production of papyrus. Since the latter stages of Holy Roman Empire, many dealers complained about the drop in the price of gold and silver coins and the resulting imbalance between the value of Denarius and Sestertius and the actual value of the precious metal in the coins. Due to the possibility of forgery, the value of the coins couldn't be hiked up ad infinitum. The temporal scarcity of gold and silver, improvements in the production of paper, as well as the impracticality of coins for increasingly expanding trade prompted several timid attempts at the introduction of paper money from the second millennium across the world. Unlike Europe, China of the past was more densely populated and developed with trade routes. Urban workers founded the emerging Chinese middle class. (In 105 AD, paper money was invented in China). In the year 1024 came the first issuing of emergency paper money, in connection with the wars with the Song Dynasty. Marco Polo, who visited China 252 years later, reported back about the use of paper money as a means of exchange. Even at the turn of the 15th century, officials noted, however, that the temptation to cover up empty state coffers by issuing new inflationary currency was too great. The Chinese abolished printed money. In Europe, the idea was similar but postponed. In 1483, in Spain, notes were issued as a temporary replacement for missing coins. In 1609, the Bank of Amsterdam was very careful with the issuance of notes. The backing of corresponding coins was extremely important for the Dutch. The Swedish state bank, Riksbank, issued the first real notes with different values in the 1660s, but this idea only lasted a few years and ten years later, Sweden only acknowledged coins. It was the Scotsman John Law (1671-1729), who first saw a real economic advantage in the system.
Money with different systems
The finance minister, Law, from the Scottish Highlands believed that that the existing public money supply could positively stimulate the production of a country, because a large amount of available money means a lower loan rate, which leads to increased investment and hence, an edge over other countries. Controlled currency debasement would be too costly for this aim and would cause inflationary repercussions. A gold standard in turn required that gold production in the mines was predictable. For example, in 1718 Law wrote about the numerous attempts at spending paper money. Warring France's finances were severely shaken under King Louis XIV, the Sun King. The coins could not be reissued as usual and, in the meantime, had to be replaced by a kind of receipt, known as billets de monnaie. Due to a lack of coins, after a period, the state was forced to increase the interest rate on these "government securities" to 8%, but state bankruptcy could not be averted. In 1715, when the Sun King died, despite massive debt cancellation, France still had to pay off 3 million lt. (Lièvre). The competent minister could not guarantee the payment of interest. The 1718 by the private Banque Générale, which was a trading company in Louisiana and traded shares against the said government securities, this was followed by an attempt by Banque Royale to issue government-guaranteed bank notes in order to stabilise the situation. So that the institution had enough security, they took over every French oversees company and in 1719 they even leased the French taxes in the colonies. The company granted the French state massive loans and shares, due to the fact that the colonies would soon yield profits. When the value of shares worth 500 lt. quickly exceeded the 10,000 lt. mark, thanks to foreign interest, it is believed that Law, as was the aim of his policy, as well the moderate success in overseas territories and the poor leadership of the company, provided capital flight for investors in the direction of Amsterdam and London. As the price fell below the issue price, Law himself bought shares in order to shore up the price, but panic had already ensued and Law's system and with it Banque Royal's system of paper money collapsed like a house of cards. The inventors followed the funds and fled abroad. After two years, the Scotsman's experiment failed miserably. Paper money was once again abolished, 1.64 billion lt. was accepted as national debt with an interest rate of 2-2.5%, the banks remain the same, but the French scare goes down in history as the first European stock market crash.
David Hume (1711-1776) was a strong opponent of Law's theoretical ideas. He said that the monetary supply would have no impact on the economy, since monetary goods are accepted according to the their counter offer price. Due to the practical advantages of paper money, banks should use it alongside coins.
It was Adam Smith (1723-1790) who first completed the monetary theory in his work "The Wealth of Nations" (1776). The monetary supply had no effect on the production of goods, but could ease their "functionality" (Michael North, 131). Paper money was already spent in the form of security, bills and share certificates for trading in precious metals. They ought to pay attention to the printing volume, because excessive levels of production lead to inflation. In order to guarantee the confidence of (the rich) population, a re-exchange in the form of coins had to be guaranteed. A piece of evidence - less relevant in contemporary practice - can still be found on many banknotes issued by the state. It can still be read on the five-pound sterling note:
Although England was more cautious and circulated bills to a lesser extent than the French, a crisis could still have occurred here. In order to guarantee the Bank of England's exchange capacity and that of their associated country banks, there were no businesses, but rather the crown. Although the structure was quite innovative: the country banks took over the savings of the rural population and the industrialists in London gave the Bank of England the necessary credit; the system eroded at the turn of the century when Napoleon declared war on England and the population reclaimed their coins. Economic collapse did not occur, as in France, because parliament guaranteed the solvency of the state and could, along with the Bank of England, save the system.
In revolutionary Paris, the new rulers wanted to learn from the English system and so distributed interest-bearing government bonds, known as assignats. They were meant to guarantee the liquidity of the state and were funded from the sale of confiscated Church property in the first years of the revolution. Because the interest was to be dropped after a while and the state committed itself to a forced exchange, these notes became a sort of paper money, but also this time, an ever increasing amount was printed, so that by 1792 they were only worth around half of their nominal value and so became known as "monkey money" by the people. The extreme inflation of 1795/96 became the first massive deflation of modern times. The people held their money together, invested in real estate and only then the price level fell into the abyss. The new man, Napoleon, owes his rise to power in 1799, above all, to this economic misery. His first fiscal measure was the establishment of an English style, Banque de France - a central bank based on shares, which was the first decimal currency system, the Franc.
Insights from history - Summary and Outlook
The risk of inflation or deflation, accompanied and still accompanies the entire economy, because of the expanding development into digital money, which is even easier to "spend", the control has become more difficult.
The article was first published on 28.02.2011 on the website ektritik.com
Bank notes are now an integral part of our everyday lives, but in ancient Europe, money was always made up of coins of precious metal. Until 8th century AD, paper money was unthinkable, not least because of the expensive costs involved in the production of papyrus. Since the latter stages of Holy Roman Empire, many dealers complained about the drop in the price of gold and silver coins and the resulting imbalance between the value of Denarius and Sestertius and the actual value of the precious metal in the coins. Due to the possibility of forgery, the value of the coins couldn't be hiked up ad infinitum. The temporal scarcity of gold and silver, improvements in the production of paper, as well as the impracticality of coins for increasingly expanding trade prompted several timid attempts at the introduction of paper money from the second millennium across the world. Unlike Europe, China of the past was more densely populated and developed with trade routes. Urban workers founded the emerging Chinese middle class. (In 105 AD, paper money was invented in China). In the year 1024 came the first issuing of emergency paper money, in connection with the wars with the Song Dynasty. Marco Polo, who visited China 252 years later, reported back about the use of paper money as a means of exchange. Even at the turn of the 15th century, officials noted, however, that the temptation to cover up empty state coffers by issuing new inflationary currency was too great. The Chinese abolished printed money. In Europe, the idea was similar but postponed. In 1483, in Spain, notes were issued as a temporary replacement for missing coins. In 1609, the Bank of Amsterdam was very careful with the issuance of notes. The backing of corresponding coins was extremely important for the Dutch. The Swedish state bank, Riksbank, issued the first real notes with different values in the 1660s, but this idea only lasted a few years and ten years later, Sweden only acknowledged coins. It was the Scotsman John Law (1671-1729), who first saw a real economic advantage in the system.
Money with different systems
The finance minister, Law, from the Scottish Highlands believed that that the existing public money supply could positively stimulate the production of a country, because a large amount of available money means a lower loan rate, which leads to increased investment and hence, an edge over other countries. Controlled currency debasement would be too costly for this aim and would cause inflationary repercussions. A gold standard in turn required that gold production in the mines was predictable. For example, in 1718 Law wrote about the numerous attempts at spending paper money. Warring France's finances were severely shaken under King Louis XIV, the Sun King. The coins could not be reissued as usual and, in the meantime, had to be replaced by a kind of receipt, known as billets de monnaie. Due to a lack of coins, after a period, the state was forced to increase the interest rate on these "government securities" to 8%, but state bankruptcy could not be averted. In 1715, when the Sun King died, despite massive debt cancellation, France still had to pay off 3 million lt. (Lièvre). The competent minister could not guarantee the payment of interest. The 1718 by the private Banque Générale, which was a trading company in Louisiana and traded shares against the said government securities, this was followed by an attempt by Banque Royale to issue government-guaranteed bank notes in order to stabilise the situation. So that the institution had enough security, they took over every French oversees company and in 1719 they even leased the French taxes in the colonies. The company granted the French state massive loans and shares, due to the fact that the colonies would soon yield profits. When the value of shares worth 500 lt. quickly exceeded the 10,000 lt. mark, thanks to foreign interest, it is believed that Law, as was the aim of his policy, as well the moderate success in overseas territories and the poor leadership of the company, provided capital flight for investors in the direction of Amsterdam and London. As the price fell below the issue price, Law himself bought shares in order to shore up the price, but panic had already ensued and Law's system and with it Banque Royal's system of paper money collapsed like a house of cards. The inventors followed the funds and fled abroad. After two years, the Scotsman's experiment failed miserably. Paper money was once again abolished, 1.64 billion lt. was accepted as national debt with an interest rate of 2-2.5%, the banks remain the same, but the French scare goes down in history as the first European stock market crash.
David Hume (1711-1776) was a strong opponent of Law's theoretical ideas. He said that the monetary supply would have no impact on the economy, since monetary goods are accepted according to the their counter offer price. Due to the practical advantages of paper money, banks should use it alongside coins.
It was Adam Smith (1723-1790) who first completed the monetary theory in his work "The Wealth of Nations" (1776). The monetary supply had no effect on the production of goods, but could ease their "functionality" (Michael North, 131). Paper money was already spent in the form of security, bills and share certificates for trading in precious metals. They ought to pay attention to the printing volume, because excessive levels of production lead to inflation. In order to guarantee the confidence of (the rich) population, a re-exchange in the form of coins had to be guaranteed. A piece of evidence - less relevant in contemporary practice - can still be found on many banknotes issued by the state. It can still be read on the five-pound sterling note:
Although England was more cautious and circulated bills to a lesser extent than the French, a crisis could still have occurred here. In order to guarantee the Bank of England's exchange capacity and that of their associated country banks, there were no businesses, but rather the crown. Although the structure was quite innovative: the country banks took over the savings of the rural population and the industrialists in London gave the Bank of England the necessary credit; the system eroded at the turn of the century when Napoleon declared war on England and the population reclaimed their coins. Economic collapse did not occur, as in France, because parliament guaranteed the solvency of the state and could, along with the Bank of England, save the system.
In revolutionary Paris, the new rulers wanted to learn from the English system and so distributed interest-bearing government bonds, known as assignats. They were meant to guarantee the liquidity of the state and were funded from the sale of confiscated Church property in the first years of the revolution. Because the interest was to be dropped after a while and the state committed itself to a forced exchange, these notes became a sort of paper money, but also this time, an ever increasing amount was printed, so that by 1792 they were only worth around half of their nominal value and so became known as "monkey money" by the people. The extreme inflation of 1795/96 became the first massive deflation of modern times. The people held their money together, invested in real estate and only then the price level fell into the abyss. The new man, Napoleon, owes his rise to power in 1799, above all, to this economic misery. His first fiscal measure was the establishment of an English style, Banque de France - a central bank based on shares, which was the first decimal currency system, the Franc.
In other European countries, in the second half of the 19th century, financial officials only used the bills as state paper money, in order to prevent the war-related devaluation of the coins. While this plan, as often occurs in France, got out of hand and brought with it a sharp devaluation. The work of the Spanish Banco de San Carlos, which was founded for the redemption of the so-called Vales Reales, was for the time being an exception. Their precious metal reserves were used in the war against France, the notes only reached 6 per cent of their nominal value. The two great German power of the 19th century, the dual-monarchy on the Donau and Prussia, were also on this list at various stages. Austria-Hungary conducted themselves very carefully in the middle of the century and printed only very few notes, which were not used as a currency, but rather as a means of exchange for government bonds. It was only with the war against France and the associated precious metal shortage that the exchange of coins could not be guaranteed. The result was the state bankruptcy of 1811. The northern neighbors were the most careful in Europe. The levels of printing were very low up to the 18th century and were offset by a rich supply of coins. Therefore there was little acceptance of the new form of currency and the royal Giro- and Lehnbanco specialized in the assignment of mortgage loans for the purchase of land.
Insights from history - Summary and Outlook
The introduction of paper money was, from a few early attempts in Europe, linked to two developments: the emergence of society at an early stage in the UK and the French Revolution. It was the massive war effort on the part of the different Royal houses at the end of the 18th century and the resulting void in the public coffers transformed the securities from government bonds into a means of exchange. But the rulers sometimes made it too simple: what France already painfully learned, brought bankruptcy to the Vienna monarchy and discredited the concept of paper money for a long time: if the issued money supply exceeded the available goods and precious metal reserves, if it is impossible to exchange all of the issued notes back at an appropriate value then the national economy can quickly collapse. We all saw that the security of stability is most likely to be found in a mixture of national government citizenship and the middle classes, as in Great Britain.
The risk of inflation or deflation, accompanied and still accompanies the entire economy, because of the expanding development into digital money, which is even easier to "spend", the control has become more difficult.
The article was first published on 28.02.2011 on the website ektritik.com
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