While there's little truth to the idea
that Marco Polo brought pasta to Italy
from the east, there's another marvel
that the book about his travels
popularized. It was an idea, a radical one,
which is perhaps best summarized by the
very title of the chapter that discusses
it. For in the book of the marvels of the
world or as we know it "The travels of
Marco Polo", there's a chapter titled "How
the Great Khan Caused the Bark of Trees,
Made Into Something Like Paper, to Pass
for Money Throughout his Realm".
♪ Intro ♪
In ancient china they invented a coinage
system where the coins had holes punched
in them. So if you needed to measure out
large denominations you could just run a
string through the center of the coins
and a particular length of string would
hold a hundred or a thousand at once. But
over time the economy evolved.
Transactions got bigger and merchants
found themselves needing tens or
hundreds of thousands of coins to
complete transactions and of course a
strand of a thousand of these wait about
10 pounds already. So it became a real
pain in the neck to transport them. So
the government started saying: "How about
we pay you pieces of paper that have the
amount of coins we owe you written on
them and you can come pick up your coins
at the Capital whenever you want your
money." And since the government bought a
lot of things, these paper slips started
being circulated everywhere. Soon
merchants realized that these slips of
paper were always good. That they could
be turned in at the Capital for however
much was written on them whenever they
wanted. So, heck why even go to the
trouble of turning them in? Why not just
trade the slips of paper to other
merchants for their goods?
Thus the merchants began using these
promissory notes or essentially
government iou's as money and then the
government caught on and simply started
printing up money. So by the time we got
the travels of Marco Polo, paper money
was widespread and this idea started to
catch on even outside of China. Sometimes
with little success, like when Gaykhatu the
corrupt akan of the Middle East tried to
introduce paper money after he'd already
splurged the royal money. And had his
economy collapse to a cow plague. He
basically fell prey to the misconception
that simply printing money was literally
a way to print money.
Needless to say he was promptly
strangled with a bowstring. But sometimes
in other places the idea started to take
stronger hold, especially Italy. The
Italian city-states had already been
playing with this idea a little. They
were the economic dynamos of Europe and
the first truly great trading cities on
the continent since the ancient world.
They were also basically always at war.
This made carrying around great heaping
piles of cash a wee bit of a danger. So,
the merchants came up with a new system
influenced by the tales from China. At
first they began simply issuing
promissory notes, basically iou's.
Merchants would get to a new town and
stock up on supplies and trade goods but
rather than carrying the cash to pay for
them across dangerous country, they were
just give the seller an IOU, often backed
by a very famous or wealthy merchant,
promising to pay for the goods at a
later date. But here's the trick. To keep
anybody from having to haul all that
money around the merchants wouldn't ever
actually end up paying the seller
directly. Instead he would just pay a
bank in his hometown.
Here's how it would work: The merchant
selling the goods would take the
promissory note he got for them to his
local bank, which he had access to unlike
most of Europe because the Crusades had
accidentally created modern banking. Why
let a little crusade get in the way of a
good story about fiscal instruments? So
he would take the note down to the bank
and cash it in for slightly less than
its face value. Basically the bank was
buying the note from him for some amount
less than it was worth.
Then the bank which would have branches
in other cities would send a rider with
a stack of these notes out to whatever
specific city those notes had originally
come from. When the rider got to the city
he would hand them to the local branch
of the bank and then the local branch
would go collect from the merchant who
had bought the goods. So the merchant
could pay for goods in a far-off
location by paying his local bank after
the fact. A pretty huge step forward for
commerce. But what if the bank didn't
have a branch in the merchants hometown?
Well then the bank would just sell the
promissory note to another bank that did
have one there. So these promissory notes
sort of started to take on a value of
their own. People started trading these
notes and soon the bank's got in on the
action and just let you take out notes
from the bank itself if you have the
deposit to cover it. But this didn't
reach its full form for quite some time.
Fastforward about 300 years and move
halfway across the continent to the
little island hanging off of Italy side.
The year is 1640. The never popular
Charles the First monarchy is deeply in
debt. He had gotten into a tiff with the
parliament and basically disbanded it
for over a decade. But according to
English law parliament is the only group
allowed to levy taxes. Which you do need
when you're a king and flat broke. But
not Charles, no no no he had all sorts of
crazy schemes for bringing in money
without calling on Parliament. So miffed
he was at them and in 1640 we have one
fine example. He just seized all the
money in the mint. And this is kind of a
big deal because it wasn't his money in
the mint. All the merchants and the
goldsmith's of London deposited their
hard currency at the mint.
Just as a place to store it. So the king
just picked up all that cash and
declared it to be another one of his
ever-popular forced loans. And then he
proceeded to also seize all of the East
India Company's pepper just to add a
strange if somewhat delectable twist to
this tale.
Needless to say his head was promptly
separated from his body. Which leaves us
in the aftermath with a bunch of
merchants and goldsmiths. The merchants
and goldsmiths got together and the
goldsmith's basically said: "Look we have
these giant vaults for storing all of
our gold if you want to pay us a small
amount you can rent a corner of the
vault to put all of your money in". This
rapidly evolved to the goldsmith's
paying people small amount of interest
to leave their money with them, in
exchange for the right to lend it out.
This basically made them into banks. And
in their capacity as banks when people
would deposit their money
the goldsmith's would basically give the
depositor receipt which they could turn
back into claim their money. But soon
these goldsmith's made a pivotal switch.
They changed from making out receipts
which could only be redeemed by the
person who originally made the deposit
to also offering receipts that could be
redeemed by whomever held them.
This allowed people to start using their
receipts as currency. Rather than pay for
something with a pile of coins, why not
just put that pile of coins in the bank
and pay for stuff with these far more
convenient receipts? Of course as soon as
they started doing this people began to
ask for multiple receipts in small
regular denominations. So you go to the
bank you drop off 20 quid and ask the
nice fellow at the register to give you
20 receipts for one pound a piece so that
you could go out and buy some vegetables
or something with them. As soon as you do
that you basically have the banknote. The
fundamental form of paper money. And the
goldsmiths were clever folk they
started to notice the funny thing about
banknotes. These banknotes were starting
to get passed around from hand to hand
without often getting handed back in at
the bank, which meant that the bankers
could keep playing around with the money
those notes were supposed to represent
even as they circulated through the
markets. After all so long as everybody
doesn't try to turn in their bank notes
at once, the bank can lend more money
than it actually has its vaults. While
one bank note is circulating its way
from hand to hand the bank, can use the
coins that note represents to cover
somebody else turning their bank note in.
And thus fractional reserve banking was
born instantly expanding the money
supply of England. But not without
introducing some dangers. Join us next
time as we move from these Wild West
beginnings to the even Wilder West
personas that attempted to make paper
money official.