[17 February 2012]
Excerpted from Chapter One: The Missionary, from The End of Money: Counterfeiters, Preachers, Techies Dreamers—and the Coming Cashless Society by David Wolman. Copyright © 2012 by the author and reprinted courtesy of Da Capo Press No part of this excerpt may be reproduced or printed without permission in writing from the publisher.
Money doesn’t talk, it swears.
Marco Polo thought the Chinese were out of their minds. Paper money was born in China, perhaps as far back as AD 800. But it was during the Yuan Dynasty, beginning in the thirteenth century, when the sovereign ﬁrst replaced coins with paper. When Marco Polo cast his eyes upon this monetary system some 100 years later, he was ﬂabbergasted. The emperor’s mint “hath the secret of alchemy in perfection,” he wrote. Instead of circulating coins, the ruling authority passed out slips of paper stamped with a number—an amount corresponding to an equivalent handful of coins safeguarded in storage. It wasn’t real money in the way anyone had ever understood it. Yet somehow, it worked.
Adorned with marks and seals of officialdom, this special paper made from mulberry trees circulated freely, enriching the kingdom and turbo-boosting commerce. When people far and wide readily accept the same medium of exchange, opportunities for trade expand exponentially. The emperor had mandated the notes’ pass-ability, while making them redeemable for coinage. Anytime you wanted to, you could turn in the paper for coins.
In the uneconomically titled chapter of Polo’s travelogue, “How the Great Kaan [Kublai Khan] causeth the bark of trees, made into something like paper, to pass for money over all his country,” he described the bizarre arrangement, this sleight of hand that somehow wasn’t. Yet the explorer knew full well that for his readers back in Europe, the explanation would likely fall short. “For, tell it how I might, you never would be satisﬁed that I was keeping within truth and reason!” I kid you not, Polo was saying. This paper money thing is out of this world.
The ingredients of strict enforcement—anyone refusing to accept the paper currency was given the death sentence—and redeem-ability were what made the system viable. To further reinforce faith in the banknotes and in the issuing authority, the text on the notes declared that they would be valid for all eternity. In a recent interview with the BBC, the governor of the Bank of England, Mervyn King, took a stab at explaining the meaning of “forever value.” Paper money, he said, is “an implicit contract between people and the decisions they believe will be made in the years and decades to come, about preserving the value of that money. It’s just a piece of paper. There’s nothing intrinsic in value to it.” Its value, he said, is determined by the perceived stability of the institutions behind it. If the public remains conﬁdent in those issuing institutions, people will regularly accept and use paper money. If that conﬁdence breaks down, the currency, and economy, will collapse.
Nowadays, paper money printed with lofty language isn’t surprising. If anything, it would be odd to see material money lacking in patriotic rah-rah. But for people living under the Yuan Dynasty, banknotes were wildly new technology. The fact that people believed this promise (and, yes, were executed if they didn’t) enabled the emperor’s novel form of money to be used “universally over all his kingdoms and provinces and territories.”
WE THINK ABOUT MONEY always and never. Always: employment, retirement, state of the economy, college tuition, terrorism funding, trade balance with China, Goldman Sachs, and quick runs to the ATM. Never: how it actually works. In the age of zeroes-happy bank bailouts and even larger amounts of new money created by the Federal Reserve (abracadabra!), the workings of money have become so abstract that they have all but gotten away from those of us who aren’t specialists in monetary policy.
But cash we think we know. It’s real, at least real enough that you can hold it, smell it, and want to wash your hands after handling it. Paper notes and metal coins are the treasures of our childhoods, tucked under pillows by tooth fairies, delivered in secret by doting grannies, and stashed safely in colorful lock boxes as we saved up for a new toy. Despite money’s dull textbook deﬁnition—medium of exchange, unit of account, store of value, and method of deferred payment—it is by way of cash that we ﬁrst come to have any understanding of or relationship to this civilization-powering invention. When the word money reaches the ears, even Wall Streeters who hawk collateralized debt obligations will, at some level, picture a pile of Benjamins.
(The language of money, by the way, is easily garbled. You may stop at the ATM to get some cash, but when you read in the Wall Street Journal that Intel or Boeing has a lot of cash, that obviously doesn’t mean physical notes and coins. It means liquid assets: money that can readily be spent. In this book, when I use the word cash, I’m talking about physical objects. I will also sometimes use hard currency, physical money, or material money, just to mix it up a little. When I use money or currency, I’m talking in general terms, which means both material and electronic forms, unless otherwise speciﬁed.)
Our adult brains may get hung up on money’s poor distribution, tendency to inﬂate, and penchant for catalyzing strife, but that childhood longing for cash in hand still lingers in corners of the mind reserved for simpler thoughts. This may explain why spotting a penny on the ground can spark a tiny subconscious rush, one that is then, just as quickly, extinguished by our more rational selves, which know full well that a penny—let alone a dime—is essentially, and increasingly, worthless.
Economists will tell you that it’s not even worth the time and ﬁnancial hazard involved in stooping down to pick it up, possibly resulting in a back injury.
Complain as we may about reckless bankers or the federal budget, we are believers in cash. We even worship it. You may not have a god or buddha in your life, but you very much have this faith. I don’t mean you covet money like some jerk, unless you do, in which case you are. No, you have faith in money’s value. You believe in it because everyone else does, which means our faith in it is also a trust in each other—a belief in a shared purpose, or at least a shared hallucination. By the mere act of using the national currency, we all participate in this peculiar religion.
This notion is pedestrian to economists, who are busy calculating the Herﬁndahl-Hirschman index and the Kakutani ﬁxed-point theorem, or struggling to ﬁgure out how to reduce unemployment while keeping inﬂation in check. Slide money under the microscope, though, and it reveals a simultaneously petrifying and marvelous secret: its value lives and dies in our heads. As the writer and satirist Kurt Tucholsky once put it: “Money has value because it’s universally accepted, and it’s universally accepted because it has value.” That is, until something breaks the spell.
Ironically, Kublai Khan’s success with paper money is precisely what led to economic catastrophe. The Yuan Dynasty rulers gave in to a temptation that has plagued currency issuers and grade-schoolers throughout history: if no one ever bothers to redeem his banknotes for coinage, why not just print more? You can almost imagine the conversations among Khan’s advisory team: Sire, your subjects have such conﬁdence in the redeem-ability of the paper that they never bother to. The perceived value of the paper means you no longer need a one-to-one correspondence between your stockpile of coinage and the amount of paper produced. Heck, boss, you don’t even need a one-to-ten correspondence.
But faith is a fragile thing. Doubt can be sowed by all kinds of events: war, natural disaster, counterfeiting, and bank failures being some of the most common culprits. For the Great Khan, the poison was an inundation of new money into the economy. When you can enrich yourself merely by printing more paper promises that never get challenged, it’s hard not to do so. Monetary systems, however, require that there be a certain scarcity, or perceived scarcity, of the stuff. When Khan’s currency lost that, the value—the purchasing power—of the peoples’ money suddenly plummeted, and the paper money system collapsed. It would be centuries before it would resurface, this time in Europe.