In 1260, Kublai Khan created the first unified fiat currency.
The jiaochao was made from the inner layer of bark of the mulberry tree. It’s
of interest that the mulberry tree was quite common in Mongolia. What allowed
Kublai Khan to get away with treating tree bark as currency was that each bill
was cut to size and signed by a variety of officials. They affixed their seals
to each bill. To further ensure authenticity, forgery of the chao was made
punishable by death.
But even then, why would people accept bark
as being of the same value as gold and silver, which had successfully served as
“money” for thousands of years? Well, to begin with, the chao was redeemable in
silver or gold. But just to make sure it was accepted, Kublai decreed that
refusing to accept it as payment was also punishable
by death.
Today, we’re more sophisticated.
Governments no longer threaten to kill people for refusing to use a fiat
currency; they just make it extremely difficult to deal in anything but fiat
currency.
At the time, Kublai was involved
in an ongoing war with the Song. The war had drained the treasury and Kublai
was finding it difficult to continue to finance the war. And so, in 1273, he
issued a new series of the currency without having increased the gold and
silver in the treasury.
In 1287, Kublai’s minister,
Sangha, created a second fiat currency, the Zhiyuan chao, to bail out the
previous one, to deal with the budget shortfall. It was non-convertible and was
denominated in copper cash.
There’s an old saying that, if
you find yourself in a hole, the first thing to do is stop digging. Yet,
throughout history, leaders, having created a Ponzi scheme of fiat currency and
finding out that it has its pitfalls, invariably keep digging ever faster.
In Kublai’s case, as in so
many other cases in subsequent history, inflation of the chao led to economic
disaster. The chao became an utter failure.
Today,
most dictionaries define inflation as being “an increase in the price of
goods”; however, the traditional definition is “an increase in the amount of
currency in circulation.” An increase in the cost of goods due to an increase
in the amount of currency in circulation is a near-certain eventuality, but it
should not be the definition. This distinction is an important one, as it
allows us to focus on the root
problem rather than the outcome.
Marco Polo visited Asia just in time to see the initial success
of the chao. Upon his return to Venice, he informed Europe of the concept of
fiat currency. Although he
had been in Asia long enough to see the collapse of the currency, Europe took
to the idea of fiat currency like ducks to water, and fiat currency has been
used in the Western world ever since.
Not surprisingly, European fiat currencies
experienced the same outcome as the chao. Over time, every fiat currency ever
created has failed and always for the same reason: Governments become
overextended (generally due to warfare), excessive printing is implemented to
bail the government out, and the resultant inflation collapses the currency.
Fast-forward to the US in 1971. President Richard Nixon had a problem.
The treasury was being drained of gold by trading partners such as France. The
US was waging war in Vietnam, which was also draining the treasury. Mr. Nixon’s
Treasury secretary, John Connolly, with support from other presidential
advisors, recommended that the president dig the hole deeper, by going off the
gold standard and printing dollars.
Sound familiar?
It’s unlikely that Mister
Nixon was aware that he was making exactly the same mistake Kublai had made,
seven hundred years previously, and that he was doing so for the exact same
reasons, and based upon the same recommendations from his advisors.
However, the US, at that time
the greatest creditor nation in history, stepped off the economic cliff.
And yet, that occurred almost
fifty years ago. In the past, fiat currency collapse has generally been far
swifter. Why has the dollar been in suspended animation for so long?
Well,
for that, we look once again at real
money: gold and silver.
The US had joined both world
wars late. In the early years, the US became the suppliers of munitions,
equipment and vehicles for the two wars. And more to the point, they insisted
on being paid in gold.
(It should be noted here
that, as often as the US government and the Federal Reserve have tried to argue
to Americans that gold is not really money, during wartime, the US would accept
nothing else in payment for goods shipped to other countries.)
By the end of the two world wars, the US held the lion’s share of the
world’s gold in its vaults and therefore could dictate to the post-war world
what the economic standards would be.
They came up, first, with the
concept that the world would use the dollar as the default currency and, later,
that it would be the petro-dollar – the currency to be used for the settlement
of all oil-related transactions.
This
put the US on a unique pedestal. After 1971, the US could print all the dollars
it wanted and the world would just have to accept it. This, in turn, created a bubble of debt
such as the world has never seen. The US became the world’s greatest debtor nation.
But along the way, weaknesses began to appear in the bubble. Oil
producers such as Iraq and Libya announced that they would begin dealing in
currencies other than the dollar. The US reacted swiftly, killing their leaders
and destroying their governments.
Soon,
Iran made the same decision and, this time, it was supported by India, China,
Russia and even the EU. Additionally, both China and the EU created their own
international payments systems (CIPS and INSTEX, respectively), bypassing the
dollar.
Further, nations began dumping US treasuries back into the US
system.
At present, the dollar is
stable but has a critical illness. And it has occurred at a time when the US
has been at war in the Middle East for nearly two decades and is pouring
billions each year into that effort. It is also spoiling for war in Iran, which
undoubtedly will result in Iran being supported by China, Russia and possibly
the EU. The Federal Reserve has
stated publicly since 2004 that if deflation occurs, it will print as much
money as it takes to “solve” the problem – a commitment to massive inflation.
And so, history repeats. On this occasion, it’s taken longer to play
out, as the dollar has had such a great advantage over other fiat currencies.
But we’re fast approaching the point at which the dollar, like so much mulberry
bark, becomes worthless, as have so many fiat currencies before it.
When this occurs, we shall discover what Kublai Khan discovered in the
thirteenth century – that when fiat currencies fail, the world once again
returns to real money: silver and gold.
Those in our own era who recognize this may choose to prepare themselves
by converting their endangered currency into real money.
Reprinted
with permission from International Man.
Copyright
© 2019 International
Man