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).

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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"'

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/currencies/600640/the-currencies-to-bet-on-this-year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/506272/welcome-to-currency-corner-your-weekly-guide-to-the-worlds-biggest-market
Currencies

Welcome to Currency Corner – your weekly guide to the world’s biggest market

Forex is by far and away the biggest market in the world, with an average daily trading volume of over $5trn per day. Here, Dominic Frisby looks at th…
3 May 2019
Visit/504252/brace-yourself-the-global-economy-might-be-healthier-than-it-looks
Economy

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/economy/uk-economy/600824/how-the-bbc-can-survive-the-end-of-the-tv-licence
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
Visit/economy/600838/money-minute-monday-17-february-good-news-ahead-for-the-uk-economy
Economy

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019