Having spent what seems the better part of a lifetime
reading and studying the practical and theoretical ideas of the great
economists, I recently found myself at a loss when asked what economist
best explains what has happened to our money in these recent years of
superinflation. Who wouldn't? I dodged the question by defining our two
greatest current economic problems as inflation and unemployment. I said
that Calvin Coolidge once amusingly defined unemployment as a condition:
"When more and more people are thrown out of work-unemployment results."
In that same vein, I replied, "When more and more paper money is thrown
into the economy by government-inflation results."
On returning to my library, to my dismay I really
couldn't decide what economist best explains money and how the various
governments use and misuse it to any great degree of clarity in less
than a million words. The central problem of the economist during the
past century, in my opinion, is his inability to explain fundamental
economic principles with an economy of words.
If one wishes a clear and very prophetic explanation of
what governments do to create money, consult an early writer on the
subject who explored the question well before the science of economics
became a gleam in Adam Smith's eye. I refer you to the eminent Venetian
explorer and entrepreneur, Marco Polo (1254-1324), who spent a quarter
of a century living and traveling throughout the near and far east. He
returned to his native Venice in 1295 to tell Europeans about an unknown
world.
Marco Polo spent some time in the service of the
Emperor of China, Kublai Khan, one of the most powerful and richest
monarchs in medieval and modern history. Polo attained some wealth and
power himself. When he returned to Venice he found himself embroiled in
one of the many wars between the Italian city states of the time. As a
prisoner of war in Pisa in the service of Venice, he dictated to a
fellow prisoner his experiences in Asia that became his classic: The
Travels of Marco Polo.
The Renaissance
The result of the publication of this book was a rapid
increase in commerce between the Italian city states and China. This
expansion of enterprise soon spread to the rest of Europe as well. The
result for Italy was the creation of wealth and leisure that made
possible the Renaissance.
For the rest of Europe as well it meant the slow death
of the medieval period and the coming of the age of exploration and
enterprise. It was, after all, a passage to India and China by sea that
Columbus sought in 1492. The Travels of Marco Polo is among the books
that helped shape the world we now live in.
The great Chinese civilization of that period, the Ydan
dynasty, formed by Kublai Khan in 1271 is credited with sending many of
China's innovations to the Western world via Marco Polo. Its cuisine,
silk, spices, gun powder, rockets and other weapons of war are among the
most famous.
But perhaps the innovation most constructive and
destructive throughout western history, depending on whose hands it was
in, was the use of paper money as a substitute for what had been used as
real money in other civilizations-gold and silver. Gold and silver are
still acknowledged as real money in every civilized nation as well as
recognized commodities of real value in primitive societies. Paper money
was introduced as a new idea to western civilization by Marco Polo in a
chapter of his Travels entitled: "How the Great Khan Causes the Bark of
Trees, Made into Something Like Paper, to Pass for Money All Over His
Country". After reading the chapter title like that, Polo's readers
probably thought the Great Khan to be the Great Con.
Marco Polo writes as follows:
"Now that I have told you in detail of the splendor of
this city of the emperor's, I shall proceed to tell you of the mint
which he has in the same city, in the which he has his money coined and
struck, as I shall relate to you. And in doing so I shall make manifest
to you how it is that the great Lord may well be able to accomplish even
much more than I have told you, or am going to tell you in this book.
For, tell it how I might, you never would be satisfied that I was
keeping within truth and reason!
"The emperor's mint then is in this same city of
Cambaluc, and the way it is wrought is such that you might say he has
the secret of alchemy in perfection, and you would be right. For he
makes his money after this fashion. He makes them take of the bark of a
certain tree, in fact of the mulberry tree, the leaves of which are the
food of the silkworms, these trees being so numerous that the 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.
Signed and Sealed
"All these pieces of paper 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. And when all is prepared duly, the
chief officer deputed by the Khan smears the seal entrusted to him with
vermilion, and impresses it on the paper, so that the form of the seal
remains imprinted upon it in red; the money is then authentic. Anyone
forging it would be punished with death. 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 treasure of the world.
"With these pieces of paper, made as I have described,
he causes all payments on his own account to be made; and he makes them
to pass current universally over all his kingdoms and provinces and
territories, and whithersoever his power and sovereignty extends. And
nobody, however important he may think himself, dares to refuse them on
pain of death. And indeed everybody takes them readily, for wheresoever
a person may go throughout the great Khan's dominions he shall find
these pieces of paper current, and shall be able to transact all sales
and purchases of goods by means of them just as well as if they were
coins of pure gold.
"Furthermore all merchants arriving from India or other
countries, and bringing with them gold or silver or gems and pearls, are
prohibited from selling to any one but the emperor. He has twelve
experts chosen for this business, men of shrewdness and experience in
such affairs; these appraise the articles, and the emperor then pays a
liberal price for them in those pieces of paper. The merchants accept
his price readily, for in the first place they would not get so good an
one from anybody else, and secondly they are paid without any delay. And
with this paper money they can buy what they like anywhere over the
empire, while it is also vastly lighter to carry about on their
journeys.... So he buys such a quantity of those precious things every
year that his treasure is endless, while all the time the money he pays
away costs him nothing at all. Moreover, several times in the year
proclamation is made through the city that any one who may have gold or
silver or gems or pearls, by taking them to the mint shall get a
handsome price for them. And the owners are glad to do this, because
they would find no other purchaser give so large a price. Thus the
quantity they bring in is marvelous, though those who do not choose to
do so may let it alone. Still, in this way, nearly all the valuables in
the country come into the Khan's possession.
"When any of those pieces of paper are spoilt-not that
they are so very flimsy neither-the owner carries them to the mint, and
by paying three per cent on the value he gets new pieces in exchange.
And if any baron, or any one else soever, hath need of gold or silver or
gems or pearls, in order to make plate, or girdles, or the like, he goes
to the mint and buys as much as he list, paying in this paper money.
"Now that you have heard the ways and means whereby the
great Khan may have, and in fact has, more treasure than all the kings
in the world; and you know all about it and the reason why."
The Tragedy of Paper
Marco Polo's account of this unique Chinese method of
the minting of money through the use of paper is both amusing and
tragic. It is amusing to us in this so-called enlightened, modern and
sophisticated age to recall the ease at which the absolute monarch of
China controlled the currency of his empire. It is easy to laugh at how
mandarins, merchants and ordinary people were "taken" by their
government during the years of the Yüan dynasty in China under a
thoroughly autocratic regime. After all, it was the 13th century. But
look at what the western democratic governments have done to money in
this the twentieth century, It is no laughing matter, and it becomes
more tragic with each passing day.
In our own country paper money not only loses value
every day, it loses value every night as well.
What is the root of the problem the emperor of China?
He was only the ancient antecedent, and the teacher of every modern
would-be emperor who followed him through the course of history. Kublai
Khan sought only to enrich himself, while other government masters have
entertained more ambitious plans for themselves and their subjects.
Every government that has sought to relieve the distress of one portion
of its population at the expense of another through the printing of
paper money backed by nothing more than threats or promises has
contributed to the distress of all.
When dictators of all ideological persuasions flee
their shores, they flee not with paper money but with gold, silver, art
objects or diamonds. They leave the paper money and their expense
accounts for their subjects.
If one kind or gracious thing can be said for them, it
is this: They know the value of money. After all, they had it printed.
Currency Convertibility
The Value of currencies, like the value of many other
commodities, depends upon a thousand factors which cannot be measured.
These depend upon the opinions of the thousands of businessmen who want
to buy currencies and upon those who wish to buy and sell the goods
these currencies can purchase.
No government has a yardstick that can measure the
value of the goods currencies can buy, and this means that no government
has a standard for measuring the value of currencies and the rate at
which they should exchange for one another. The only possible way to
ascertain the value of a currency is to place it on the free market and
see what people will pay for it.
To fix by law an exchange rate between two currencies
which will represent the true value of both currencies is impossible.
When values depend upon so many factors which cannot be measured, then
it is almost inevitable that a fixed rate must cheat one of the parties
to every exchange transaction.
George Winder
At the time of the original publication, Mr. Kennedy
was a student of liberty and a free-lance writer in Berkeley,
California.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
December, 1977, Vol. 27, No. 12.
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