Dateline: Jakarta, Indonesia
The cafe scene here in Jakarta is quite something. Like many cities in Asia, some of the best casual and upscale dining is done in shopping malls. As a westerner, it’s easy to scoff at this as I did – until I had one of the best meals of my life at the IFC Mall in Hong Kong (at $300 for two, I’m sure glad it was).
If I were Starbucks, I’d be a bit worried here in Indonesia. Upscale malls such as Grand Indonesia and Pacific Place have scores of locally-owned cafes with ambience infinitely more quaint – and less expensive prices – that than of the global chains, and at lower prices.
A huge mug of great tea can go for less than $2. And the friendly staff is happy to let you sit for awhile and churn out your next article or have a long business meeting.
Sipping on a lychee oolong tea, I’m reminded of my first trip to China a number of years ago. Fascinated by the tea house culture, I camped out in a few of them and spent one particular visit hearing the story of Chinese Flying Money.
It’s another lesson that, hundreds of years later, government hasn’t learned about its fiat currency funny money.
Frequent readers of this site know I’m a bit of a Sinophile. While I don’t defend everything the Chinese government does, I defend even less of what the United States government does, so it’s hard to be indignant with them.
But the Chinese culture is not only one of the most interesting but most promising cultures on earth. The Chinese are big buyers of gold as a store of value. Their ancestors did, however, invent paper money.
The Chinese flying money mistake to avoid
For much of its storied history, the Chinese used precious metals and even silk to pay large sum debts. For everyday transactions, they used bronze.
By the ninth century, however, the idea of paper money came about. But it wasn’t always the same fiat currency we know today.
You see, in the ninth and tenth centuries, business in China was booming. GDP was through the roof. New businesses were springing up like weeds to serve the growing trade markets. Farmers had found ways to substantially increase yields. Life in China was grand.
As the economy increased, strain on resources made it hard to find more metals to trade with. The ruling class eventually gave up and added lead to coins, debasing the currency from 300 million coins in 983 to nearly two billion only twenty-four years later.
When tea trading started booming, traders decided to exchange private notes. They basically became the earliest central bankers, trading in their own funny money backed by the confidence they had in each other.
But the Chinese have always been rather pragmatic, and the public regarded this trend as nothing more than “flying money”.
This private system wouldn’t last for long. Even twelve hundred years ago, the government’s tendency to stick its nose into private matters was alive and well.
It goes to show that arguments for getting the government out of our lives aren’t rooted in anything new. The tendency of a self-appointed mafia to dictate how we run our affairs is hard-coded in a certain part of humanity, and we have to adapt in order to avoid it.
For twelve hundred years ago, the Chinese system of paper money was born in the form of letters of credit that traveled long distances. It didn’t take long for the government to come in and take over this market.
The same goes for private currencies that were traded in the Sichuan province. While today Sichuan is known for its spicy food and thriving cities like Chengdu, is always struggled with copper shortages. No copper meant no bronze for everyday transactions.
Sichuan merchants devised a plan to trade in iron coins, but the general public found them to be heavy and cumbersome. Paper money was welcomed as a remedy to the heavy coinage, and the government soon came in and took over the rather profitable iron banks that dealt in this trade, as well.
With the government involved, the public started to balk. Paper money was used sparingly during parts of the eleventh through fifteenth centuries.
However, the Song dynasty was the first to churn out true paper fiat currency, albeit somewhat begrudgingly. Issuance of the funny money was done in small amounts at first… just as it usually is.
If we’ve learned anything from government, it’s that they prefer the “frog in the pot of boiling water” method. They’re careful to never turn the heat up at the first opportunity, for fear of losing power.
As time went on, however, the Song government became more and more involved with its new funny money. Soon, paper money was being issued with a specified redemption period, usually three years. After the three years was up, the notes were worthless.
Except if you replaced them with your friendly local government officials… at the cost of a 3% service charge.
The government not only found a way to debase its country’s monetary policy, but to profit off of the artificial “expiration” of its own banknotes.
Imagine someone claiming your gold couldn’t be used for trade because it “expired”.
But things would get worse.
The most famous Chinese proponent of fiat currency was none other than Kublai Khan. The Khan had a plan to build up fiat currency credibility that was so simple in its design.
He’d simply force all traders to accept it under penalty of death.
What began as a debatably easier way to lug large sums of “money” between trading partners was commandeered by the government, bastardized with phony fees, and finally forced to be accepted at the point of a gun.
It goes to show just how much confidence the government has in its ideas.
Unfortunately, these historical examples only serve to instill more confidence in modern day government mafias.
While you aren’t likely to hear someone quoting Kublai Khan on the Senate Floor, his and similar monetary policies merely added to the Desperate Government Playbook that continues to grow over the years.
Unlike Barney Stinson’s “Playbook”, government leaders aren’t very creative. For all their talk about modernity, they’re using the same plays used in early dynastic China, just with a modern twist.
Hundreds of years after the the government commandeered the private currency market in dynastic China, punks like FDR were making discounts a crime during an economic depression. (Even then, they had to pass the bills to know what was in them.)
FDR’s Hundred Days policies brought all kind of nasty measures to force higher prices on the public and boost crony capitalism. Of course, FDR also confiscated all the gold he could get his hands on.
Modern politicians like to kid themselves into believing that their superior intelligence allows them to run a “modern” version of monetary policy free from the pitfalls of the past.
After all, today’s politicians are sooooo much smarter than their predecessors.
That’s why Ben Bernanke believes you can print your way to solvency, Janet Yellen hasn’t seen a recession coming since Nixon, and Joe Biden wants to spend his way to debt-free status.
The only difference between dynastic China’s funny money and the modern day political pimps is that the Song dynasty had some of the most significant economic growth in world history. Monetary policy grew out of a need for rapidly growing commerce, not government desperation.
While the government showed its hand in both cases, China enjoyed economic prosperity all those years ago, while the modern western world is teetering on the brink of collapse.
And it all came about because the government believed it was owed the right to participate in every transaction and every aspect of trade.
Don’t fool yourself into believing today’s governments are any better. There’s nothing more sophisticated about the voodoo being peddled to the public today.
There’s no magic pixie dust being sprinkled on The Land of the Free that will save it from inevitable economic collapse just because it’s the United States. Fighting for “revival” and the “right politicians” won’t turn back the tide.
When politicians and bankers tell you their modern funny money ways are backed by some new research or a new algorithm that will make them work, run the other way.
The best places to base your business and your savings are the places that realize government intervention in the monetary system is a centuries-old recipe for disaster.