Merryn's Blog

The endless cycle of currency debasement

Modern money started out as a perfectly good idea. But ever since it was invented, the temptation to debase it has proved too strong to resist. It's a lesson we seem incapable of learning.

If you ever wonder quite how often financial history can repeat itself before we get some kind of a long term grip on global economics, you might consider some New Year reading in the form of Sean Corrigan's book Santayana's Curse.

In it, he relates the early history of modern money, invented in China. It started as a medium of exchange between merchants, but swiftly attracted the attention of the state. By the 1020s the state had given itself the sole right to issue paper notes (which were woodblock printed).

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As is case with most financial innovations, this started out as a perfectly good idea. The money was easy to carry and use and it was also fully backed by the actual metals it represented (bronze and iron coinage and silver bullion). That made it, says Corrigan, "relatively benign in its early workings." It didn't stay that way.

By 1127 the coinage was heavily debased by lead, and the demands of various conflicts had led to enough money printing to mean that "unashamed paper inflation was in full swing"'

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In 1135 full convertibility from paper to metal was suspended, with "what were with the benefit of nine centuries of hindsight entirely predictable results." As a contemporary observer noted: "The price of silver becomes more expensive by the day while that of paper constantly declines". Sounds familiar doesn't it?

By the time the Song dynasty (960-1279) had come to an end thanks to the Mongol invasion its leaders had presided over a near-95% depreciation in the value of their currency. Things went downhill from there.

For what happened next, you might get your own copy of the book, but the short version is simply that this cycle from sound money to debased money and back again appears to be endless (here's a nice list of hyperinflations) and that along its way it has done everything from encouraging "widespread entrepreneurial misdirection" to engendering corruption, inciting insurrection and dragging us all into the hellfire of war. As, of course, it still is.

Those who cannot remember the past (as the curse goes), are condemned to repeat it.




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