The History of Paper Money - Origins of Exchange - Extra History

in #history6 years ago

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How did humanity come to accept rectangular pieces of pulped trees as something to spend eight to ten hours a day working for?

It's a pretty insane story.

This change from hard currency like gold or silver

is a really huge deal.

Without it, we couldn't possibly have the massive industrial

and post-industrial economies we know today.

This change revolutionized how we do business

and forever altered how governments were financed.

Learning about this massive sea change

in how we as a species thought about money

can help us reflect on our current historical shift

from seeing paper as money, to seeing bits,

seeing digital ones and zeros as money.

But before we can get the exciting story of people

trying to convince other people that paper was worth something,

to understand why this is such a huge deal,

we have to discuss a bit about how we thought about money before paper.

If we go way back to the beginning of society,

we find trade.

Before early humans even really settled down,

there's evidence that, when we met, we exchanged things we had made or things we'd found.

But as soon as humans started to cultivate the earth and form societies,

we started to specialize

and that meant that we not only loved to trade, we had to.

Now, often when we think of trade we think of long distance trade.

We think of caravans loaded with exotic goods.

But for our story, we have to talk about local trade.

Because here's where we run into the problem of Coincidence of Wants.

Or rather, we run into it everywhere.

But if we fail to solve this problem at the local level,

society breaks down

and we can't have the specialised trades we need to run anything

beyond the smallest gathering of people.

So what is a Coincidence of Wants?

It's the basis on which trade can exist.

Let's say that I make shirts,

and you grow food.

Well, if you want a shirt and I want food,

awesome, we can trade. But if I don't want
your stupid food, or if you're all full

up on shirts,

well, we can't trade, can we? And that
starts becoming a real problem for

society if i want food but you don't
want my shirts. Maybe I can find somebody

with some third good that you do want.
But that means that a lot of time is

consumed by trading. And if I can't find
some other good you want to trade for,

well, there's gonna be trouble. And this
problem runs even deeper than we

sometimes think about

when you consider the lack of
refrigeration and transportation. Imagine

I'm a fisherman and you're a farmer, and
let's say that we want to trade.

Well there's this problem; your harvest
only comes in once a year. I can't trade

you for a harvest you don't have yet, and
all of those extra fish I caught today

are going to be pretty rotten by the
time your harvest comes in. And while

this may seem like a very specific
example, trade for food was probably the

most prevalent trade of the ancient world.
So we need to find a third good that we

both want that we can trade for. But
wouldn't it be convenient if there was

some universal third good which
everybody wanted and would trade for?

So we didn't have to do some long chain of bartering every time we wanted something.

Enter, money. All money is is a third good
that doesn't spoil and that we all agree

has value, thus becoming a unit of
exchange; An intermediary good, by which

all other goods can be traded.

And while we often think of coins made
of precious metals for this purpose, the

truth is, so long as it's durable enough
and hard enough to procure, anything can

serve as money. Tangent time: Turns out
we have used a lot of weird stuff as

money over our history. For example,
cattle have often served as money. I mean,

they're fairly durable, they last for
years,

they're practical, and they're reasonably
scarce. When Europeans arrived in the

Americas, alcohol often served as
currency. You could literally drink your

paycheck. Cigarettes have often become
money of prisons and POW camps.

Back in ancient China, money in the shape of tools and then knives became some of the

first examples of precious metal money.
And, my personal favorite, on the island

of Yap, gigantic limestone donuts serve
as money. They are so huge that once they

are brought to the island,

no one even moves them. They just remember who owns which ones. In fact, all of these

stones had to be quarried off-island,
because there's no naturally-occurring

limestone on Yap.

And once when a crew was coming back
from a quarrying expedition, a storm hit and

sent their stone to the bottom of the
ocean. But the crew survived and told

everybody what had happened, and the
Islanders decided that "Eh, it still

counted." So to this day, somebody owns
that giant piece of stone money at the

bottom of the sea. And even though it's
not really in use today, for hundreds of

years that stone was used to buy and
sell things, even though no one had

ever seen it, giving Yap, in some ways, one of the most forward-thinking monetary

systems before the modern era. But if we
want to talk about the king of them all,

the form of money that has been used the
longest and over the widest expanse of

the globe, we have to talk about one
thing.

No, not gold. Although in fairness, that's
what I would have guessed too. Nope, it's

the cowry shell. It's durable, impossible
to counterfeit, and without modern

harvesting techniques it's not so easy
to acquire that inflation will run

rampant. Anyway, tangent over, back on
target.

We have lots of different possible types
of pre-modern money, including the gold

and silver coins that we so often think
of when we think of money of the past.

But all of these different types of
money have one thing in common: they are

what we call commodity money, because
their value is in the commodity

themselves. Even cowries were seen as
rare and beautiful, and can be used for

jewelry and the like, and so were thought
of as having intrinsic value. The same

way we feel gold has an intrinsic value
for its scarcity and its uses.

Now, that makes a lot of sense for a
currency. It feels secure and reasonable.

You can trust to the worth of that gold
coin in your hand.

I mean, after all, if you're used to
trading one thing for another,

why would you ever trade something
valuable like a horse for something

worthless like a pile of paper? But for
gold or for cowries, well that's

another story. But when your economy
grows, this system starts showing some of

its limits. For one thing, commodity money is heavy.

If you're doing massive deals, it gets
really hard to transport. And it's risky

to transport across lawless lands.
Commodity money is also often subject to

debasing, where somebody. usually the
person who should be responsible for

making sure the currency maintains its
value, waters down the whiskey, or takes a

gold coin, melts it down, and reforges it
with a bit less gold in it, and passes it

off as worth the same amount. But more
than anything, when you get to gigantic

economies, the very scarcity that makes
commodity money seem to have value

becomes your enemy. Like, let's take gold
and silver. What happens when your

economy grows to the point where you
just can't get enough of it?

We actually saw the effects of this in
our episode on the Opium Wars, where so

much English silver was ending up in
China in exchange for tea,

it was actually causing inflation, and
hampering basic economic transactions at

home. And this really comes into effect
when we get to more modern government

finance, and the financing of war.

What happens to a nation when it has to
make a sudden drastic uptick in its

spending, but can't get enough specie to
cover its cost? Even from those who are

willing to lend? As I am sure we will see
in future Extra History episodes, it

plays havoc with an economy, and even the ability to prosecute a war. And the

reverse of this is true as well.

Currencies based on scarcity are often
subject to changes in the scarcity of

the commodity on which they're based, which can be trouble when somebody finds a lot

more of your currency commodity. When
Spain started to important massive

amounts of silver and gold from the
Americas, all the precious metal-based

currency in Europe started to suffer
from inflation. After all, all those gold

coins weren't worth nearly as much since
somebody had just dumped a huge new pile

of gold on European shores. And as a
government, or even a financial sector,

when someone digging up a new pile of
minerals means that you can't control

your own fiscal policy, then that's bad
news. But those disadvantages are only

easy to see if you're a head of state or
working on the largest-scale

transactions. If you're just some average
person in the street, when some

well-to-do says that they want to take
your grain in exchange for this nice

slip of... is that paper?

Well, you would be forgiven for thinking
that you smell a rat. Join us next time

as we finally delve into the origins of
paper money, and start to address this

problem of people fearing to give up
their outdated gold.

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