The Wild and Wooly Story of Money
or how did we get to the financial mess we're in?
It all started with a Chinese emperor who issued the first paper money -- and was willing to use deadly force to compel his subjects to use it instead of traditional media of exchange.
But it really took off in England, thanks to the Glorious Revolution that got rid of James II and brought in William of Orange as co-ruler with Mary II. As Prince of Orange in what is now the Netherlands, William brought some baggage with him -- a longstanding quarrel with King Louis XIV of France.
So now England was looking at a war with France, and Parliament needed to figure out a way to finance it. The solution was to borrow a huge sum, and then allow bankers to accept deposits and print banknotes as receipts for the deposit. The gold could then be lent to the king, and the banknotes could be used as negotiable instruments for ordinary commerce.
Those wars effectively bankrupted France, and after the death of the Sun King, the Regent for the new boy king was looking for a solution. Enter one John Law, a Scottish adventurer with a checkered past. He created a system of fractional reserve banking by which his bank would buy back notes on the king's debt and credit the seller with the full value -- in paper money, rather than gold. He also created a joint-stock company, the notorious Mississippi Company, and in the process created a disastrous bubble of speculation.
In the centuries since, our financiers have found ever-multiplying ways of converting debt into negotiable instruments -- and fueling speculative bubbles that inevitably burst and caused economic disasters. Most recently, we have had the mortgage-backed securities mess that led to the 2008 real estate crash, and there are signs that other monetized debts are about to turn ugly on us.
It all started with a Chinese emperor who issued the first paper money -- and was willing to use deadly force to compel his subjects to use it instead of traditional media of exchange.
But it really took off in England, thanks to the Glorious Revolution that got rid of James II and brought in William of Orange as co-ruler with Mary II. As Prince of Orange in what is now the Netherlands, William brought some baggage with him -- a longstanding quarrel with King Louis XIV of France.
So now England was looking at a war with France, and Parliament needed to figure out a way to finance it. The solution was to borrow a huge sum, and then allow bankers to accept deposits and print banknotes as receipts for the deposit. The gold could then be lent to the king, and the banknotes could be used as negotiable instruments for ordinary commerce.
Those wars effectively bankrupted France, and after the death of the Sun King, the Regent for the new boy king was looking for a solution. Enter one John Law, a Scottish adventurer with a checkered past. He created a system of fractional reserve banking by which his bank would buy back notes on the king's debt and credit the seller with the full value -- in paper money, rather than gold. He also created a joint-stock company, the notorious Mississippi Company, and in the process created a disastrous bubble of speculation.
In the centuries since, our financiers have found ever-multiplying ways of converting debt into negotiable instruments -- and fueling speculative bubbles that inevitably burst and caused economic disasters. Most recently, we have had the mortgage-backed securities mess that led to the 2008 real estate crash, and there are signs that other monetized debts are about to turn ugly on us.