Thursday, July 17, 2014

Happy Birthday Paper Money: Celebrating 353 Years of Wanton Destruction

By Simon Black

If you ever find yourself vacationing in the western Pacific, I highly recommend swinging by Yap Island, home of one of the most bizarre forms of money in history.

Over a thousand years ago, natives would mine enormous chunks of limestone and carve them into gigantic circular discs.

I'm talking REALLY big... a typical disc would be 5 to 10 feet in diameter, over a foot thick, and weigh several tons.

They called them 'Rai Stones', and they were actually used as currency. Curiously, an indiviaul rai would be valued not based on its weight or size, but based on its story.

If many people had been killed transporting it, or if the stone had once belonged to a famous warrior, the rai would be worth more. So it was a bit of a collectible as well as a form of money.

Needless to say, the sheer size of these stones meant that they wouldn't be moved very often. Everyone on the island just sort of knew who owned each rai, like a primative form of Bitcoin's blockchain.

The polar opposite of this is the paper money system, something that has its origins in the Han Dynasty over 2,000 years ago.

It wasn't quite paper, but the ancient Chinese experimented with leather-skinned money as early as the second century BC.

The idea died for over a thousand years in favor of (mostly) gold and silver. But it popped up again in the Middle Ages where Chinese merchants used short-term credit notes rather than haul around heavy coins.

When the Mongols basically took over the entire planet, they adopted this idea, much to the astonishment of their European visitors. Marco Polo writes of this in his diary with total incredulity:

"The Great Kaan causeth the bark of trees, made into something like paper, to pass for money all over his country. . . And nobody, however important he may think himself, dares to refuse them on pain of death."

But it wasn't until 1661 that the first modern paper money was born.

Johan Wittmacher was a Latvian merchant of Dutch descent who had a burning idea he wanted to try; he just needed a willing country.

Wittmacher moved to Sweden and tried several times to obtain a banking license. Finally, after promising a 50% profit share to King Charles X Gustav, his license for Stockholms Banco was approved in 1657.

On July 16, 1661, his bank became the first in history to issue paper banknotes-- Kreditivsedlar.

These Kreditivsedlar solved a huge problem for Wittmacher. All the gold deposits he was holding on behalf of bank customers were primarily short-term. Customers would frequently withdraw coin, so he needed to keep inventory handy.

On the other hand, he wanted to increase profits by loaning out his customers' gold. Problem was, most of the loans were longer term.

Wittmacher's dilemma was satisfying his customers' short-term withdrawals while still making long-term loans. The solution was paper.

When a customer would make a withdrawal, Wittmacher gave them paper notes as claims on the gold he was holding.

The customer could use the notes to pay for goods and services, and Wittmacher got to keep the gold and make more loans.

In time, the notes became a popular medium of exchange, accepted everywhere just like gold. People would pass them around as money, only occasionally showing up to the bank to redeem them for gold.

Naturally it didn't take long for Wittmacher to start committing fraud. Before long he'd issued more notes than he had gold in his vault. And he was making more loans than the bank could afford.

After only seven years, the bank collapsed. But the idea of paper notes lived on to infect the evolution of money ever since.

Our modern system entitles a central banking elite to conjure trillions of dollars, euros, yen, etc. out of thin air, creating massive financial distortions and enabling politicians to rack up epic debt levels.

Today's commercial banks take in customer deposits, maintain a laughably small portion in reserve, and use the rest of our money to make idiotic loans for their maximum benefit.

Their brokerage divisions front-run customers, trade against them, lend out customers' shares without their knowledge, and even 'borrow' money from customer accounts to cover their own trading losses.

When they fail, they're bailed out by taxpayers and do the same thing all over again.

In Wittmacher's time, this was fraud. Today it's not only legal, it's the industry standard.

No one is held accountable save some sacrificial lamb, and we're told that we should simply trust in the guarantee of a bankrupt, insolvent government.

So... happy birthday paper money. It's a hell of a system you've brought us.

Simon Black is Senor Editor  at SovereignMan.com

1 comment:

  1. GLD amendment refers to "unforeseen reasons" for unallocated failure

    GLD has some amendments to its terms up for vote, one of which is "that creations may only be made after the required gold deposit has been allocated to the Trust Allocated Account from the Trust Unallocated Account" (hat tip I Shrugged; see here for an explanation of the existing creation process). What is interesting is the explanation of why they are making this amendment:

    "This amendment provides additional security for Shareholders by eliminating potential risks related to issuing baskets of Shares against unallocated gold if the Custodian was to become insolvent or if the unallocated gold was otherwise not allocated for some other unforeseen reason."

    My emphasis on the bold bid. The risk they are referring to here is because the Authorised Participants only deliver unallocated to the Custodian and it is up to the Custodian to find the physical to allocate. This puts all the pressure on the Custodian. The amendment does raise the following questions:

    Why the need to clarify this now, is there something the World Gold Council (who sponsors GLD) knows about the state of the market that didn't exist before?
    Why would unallocated gold now have a risk of not being allocated?
    Is there an increased risk of intra-day failures for large unallocated allocations?
    What are these unforeseen reasons?
    And why are none of the more excitable gold commentators hyping this up as more proof of the end of the London bullion banking system? :)(Probably because they didn't get the letter as they are smart enough not to hold GLD, which has numerous other issues which only make it suitable for short term trading IMO).

    http://goldchat.blogspot.com/2014/07/gld-amendent-refers-to-unforeseen.html

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