Genghis Khan’s army captured Beijing in 1215. With these vast new real estate holdings, they grew tired of carrying around the various coins being used as money. Nomads traveled light.
And so when Genghis’s grandson, Kublai, took control of the family’s empire in 1260, he created an “inaugural treasure exchange voucher.” Quite a term for the world’s first instance of paper money.
Khan then made trading bronze coins illegal, putting a (temporary) end to longstanding tradition. Unlike coins, which have to be mined and fashioned into shape—and which are subject to being shaved at the edges by crafty robbers trying to eke out a little more weight—paper money can be printed at will.
Khan resisted printing too much money. Then his crusading temperament got the best of him. He needed capital to fund a war with neighboring Japan. After two failed attempts at overtaking the country, he kept printing more money, leading to the world’s first instance of inflation caused by paper bills. Things got hectic.
The economy eventually stabilized after a brief scare. Lesson learned: Khan got ahead of himself in his hunger for domination. Yet, as the adventurer Marco Polo later observed, the value of paper bills held after that initial period of uncertainty.
What happened next changed the course of history, as journalist Jacob Goldstein notes in his book, Money: The True Story of a Made-up Thing.
People in China had figured out that paper money worked not because it was backed by silver or bronze, but because everyone agreed paper could be money.
A matter of faith
Money is rooted in belief.
Goldstein opens his book pushing back against the longstanding idea that money evolved from barter. This pedestrian notion has persisted due to its plausibility: I’ll give you this cow for a bushel of wheat. Ok, now I’ll give you these stones for that bushel of wheat.
Seductive, but untrue. At least: not the whole picture. Goldstein writes that money is “something much deeper and more complex.” Money, in fact, is a social technology that emerged from rituals. It represented a deeply-held sense of empathy woven into the fabric of human societies.
Reciprocity and gift giving are ancient forms of communication. As technologies advanced and people spread across the planet, previously self-sufficient groups needed to create rituals around goods and services. It would be a while before the Greeks created the polis and really contemplated theories like redistribution and democracy. Yet these ideas didn’t emerge whole cloth: it’s natural for people to want to give, and to want to receive. What we now call money grew out of this impulse.
It’s not like business didn’t play a role. A way to store value is the last piece of the money puzzle. People realized that certain goods would be needed in the future, for weddings and seasonal festivals and the like. They stockpiled gourds and rice in anticipation of a return on their investment.
Precious metals emerged as a clear winner for storing value. Scarcity has long been desired. Around 600 BCE miners in present-day Turkey dug up a silver-gold alloy, electrum. The Lydians started forging this rare alloy into coins—some a mix, others by isolating either the silver or gold. Then they stamped a lion on each one.
The neighboring Greeks thought this a good idea. These “standardized lumps of metal” became the prototype of everything we call money today. Credit Greek society for rapidly expanding during this time. The growing government needed stores of value to make an increasingly large society function. Thus far, iron cooking spits and lumps of silver had sufficed. Such objects became cumbersome as more people rushed in. And so, as Goldstein writes,
Money was coins, and coins were money.
Convenience is a form of belief, too.
The future of money
Resistance is as much a part of this story as acceptance. History is generally written by the winners, so a smooth transition from pots to coins becomes the narrative spun by ancient Greek historians. But you can be sure a number of artisans were not happy with this policy change.
Something similar happened in China. The Hongwu emperor, who would go on to found the Ming Dynasty, grew up the son of a poor farmer. He rose to power as an anti-Mongol rebel. And he was a bit of a romantic. He craved the days of yore when the market was based on tribute and redistribution, the very factors that led to the creation of money. He eventually rid China of paper bills, with detrimental effects.
The average person in China was poorer than her ancestors had been two hundred years earlier. The economic revolution that happened when paper money was invented was largely forgotten.
Paper bills continued to grow in popularity globally, however. By the middle of the 19th century, 8,370 different types of paper money were circulating in America—a story so fascinating it deserves its own post. Confusing as they were—shopkeepers kept giant catalogs at the register to figure out how much each bill was worth, and whether or not it was even valid—those bills remained popular for some time. And then something even easier to carry around took hold: numbers in an account stored in an app on your phone.
In another book also titled Money, economist Felix Martin points out that 90% of US money and 97% of UK money has no physical existence at all. The Hongwu emperor pined for a time with no paper money; we seem to be in a place where some romanticize the bills in their folds. And that’s okay, for the moment—multiple types of currency can co-exist. But we need to make sure we don’t fall into the same trap as the Ming Dynasty and bankrupt a nation, or a world, due to a type of money whose time has passed.
Money might be rooted in belief, but Goldstein concludes his excellent survey by noting that money is a choice, or at least a set of choices. Still, he concedes that it doesn’t feel that way. The foundation of many cognitive biases is “I’m just used to this” or “I’m not comfortable with that.” Until that proves to be a convenience of comfort, and becomes the thing we cling to.
Because, as Goldstein writes in his conclusion,
There’s nothing natural or inevitable about the way money works now. We know money will be very different in the future; we just don’t know what kind of different it will be.
Here’s to the future.