SPEAKER_00: Amazing, fascinating stories of inventions, ideas and innovations. Yes, this is the podcast about the things that have helped to shape our lives. Podcasts from the BBC World Service are supported by advertising.
SPEAKER_01: 50 Things That Made the Modern Economy with Tim Harford
SPEAKER_03: Almost 750 years ago, a young Venetian merchant named Marco Polo wrote a remarkable book chronicling his travels in China. It was called The Book of the Marvels of the World and it was full of strange foreign customs that he claimed to have seen. But there was one that was so extraordinary Marco Polo could barely contain himself. Tell it how I might, he wrote, you never would be satisfied that I was keeping within truth
SPEAKER_02: and reason.
SPEAKER_03: What was exciting Marco so much? He was one of the first Europeans to witness an invention that remains at the foundation of the modern economy. Paper money. Of course the paper itself isn't the point. Modern paper money isn't made of paper, it's made of cotton fibres or a flexible plastic weave. And the Chinese money that so fascinated the Venetian wasn't quite paper either. It was made from a black sheet derived from the bark of mulberry trees, designed by multiple officials and with a seal smothered in bright red vermilion, authenticated by the Chinese Emperor Genghis Khan himself. The chapter of Marco Polo's book was titled somewhat breathlessly. How the great Khan causes the bark of trees made into something
SPEAKER_02: like paper to pass for money all over his country. The point is, whatever these notes
SPEAKER_03: were made of, their value didn't come from the preciousness of the substance, as with a gold or silver coin. Instead the value was created purely by the authority of the government. Paper money is sometimes called fiat money. The Latin word fiat means let it be done. The great Khan announces that officially stamped mulberry bark is money and lo, let it be done. Money it is. The genius of this system amazed Marco Polo, who explained that the paper money circulated as though it was gold or silver itself. Where was all the gold that wasn't circulating? Well, the Emperor kept a tight hold of that. The mulberry money itself wasn't new when Marco Polo heard about it. It had emerged nearly three centuries earlier, around the year 1000 in Sichuan, China, a region now best known for its fiery cuisine. Sichuan was a frontier province bordered by foreign and sometimes hostile states. China's rulers didn't want valuable gold and silver coins to leak out of Sichuan into foreign lands, and so they told Sichuan to use coins made of iron. Iron coins aren't terribly practical. If you traded in a handful of silver coins, just 50 grams worth, you'd be given your own body weight in iron coins. It's no surprise that the merchants of Sichuan began to experiment with an alternative. That alternative was called Jiaozi or exchange bills. They were simply IOUs. Instead of carrying around a wagon load of iron coins, a well-known and trusted merchant would write an IOU and promise to pay his bill later when it was more convenient for everyone. But then something unexpected happened. These IOUs, these Jiaozi, started to trade freely. Suppose I supply some goods to the eminently reputable Mr. Zhang and he gives me an IOU. When I go to your shop later, rather than paying you with iron coins, who does that, I could write you an IOU. But it might be simpler and indeed you might prefer it if instead I give you Mr. Zhang's IOU. After all, we both know that Mr. Zhang is good for the money. Now you and I and Mr. Zhang have together created a kind of primitive paper money. It's a promise to repay that has a marketable value all of its own and can be passed around from person to person without being redeemed. This is very good news for Mr. Zhang because as long as one person after another finds it convenient simply to pass on his IOU as a way of paying for things, Mr. Zhang never actually has to stump up the iron coins. Effectively, he enjoys an interest-free loan for as long as his IOU continues to circulate. Better still, it's a loan that he may never be asked to repay. No wonder the Chinese authorities started to think that these benefits ought to accrue to them rather than to the likes of Mr. Zhang. At first, they regulated the issuance of Jiaozi and produced rules about how they should look. Soon enough, the authorities outlawed private Jiaozi and took over the whole business themselves. The official Jiaozi currency was a huge hit. It circulated across regions and even internationally. In fact, the Jiaozi even traded at a premium because they were so much easier to carry around than metal coins. Initially, government-issued Jiaozi could be redeemed for coins on demand, exactly as the private ones had been. This is a logical enough system. It treats the paper notes as a placeholder for something of real value. But the government soon moved stealthily to a fiat system, maintaining the principle but abandoning the practice of redeeming Jiaozi for metal. Bring an old Jiaozi into the government treasury to be redeemed and you would receive a crisp new Jiaozi. That was a very modern step. The money we use today all over the world is created by central banks and it's backed by nothing in particular except the promises to replace old notes with fresh ones. We've moved from a situation where Mr. Zhang's IOU circulates without ever being redeemed to the mind-bending situation where the government's IOUs circulate despite the fact they cannot be redeemed. For governments, fiat money represents a temptation. A government with bills to pay can simply print more money. And when more money chases the same amount of goods and services, prices tend to go up. The temptation quickly proved too great to resist. Within a few decades of its invention in the early 11th century, the Jiaozi was devalued and discredited, trading at just 10% of its face value. Other countries have since suffered much worse. Weimar Germany and Zimbabwe are famous examples of economies collapsing into chaos as excessive money printing rendered prices meaningless. In Hungary in 1946, prices trebled every day. Walk into a Budapest cafe back then and it was better to pay for your coffee when you arrived, not when you left. These rare but terrifying episodes have convinced some economic radicals that fiat money can never be stable. They yearn for a return to the days of the gold standard when paper money could be redeemed for a little piece of precious metal. But mainstream economists generally now believe that pegging the money supply to gold is a terrible idea. Most regard low and predictable inflation as no problem at all, perhaps even a lubricant to economic activity. And while we may not always be able to trust central bankers to print just the right amount of new money, it probably makes more sense than trusting miners to dig up just the right amount of new gold. The ability to fire up the printing presses is especially useful in crisis situations. After the 2007 financial crisis, the US Federal Reserve pumped trillions of dollars into the economy without creating inflation. In fact, the printing presses were metaphorical. Those trillions were created by keystrokes on computers in the global banking system. As a wide-eyed Marco Polo might have put it, the great central bank causes the digits on a computer screen
SPEAKER_02: made into something like spreadsheets to pass for money. Technology has changed, but
SPEAKER_03: what passes for money continues to astonish.
SPEAKER_03: Just before you go, I'd like to recommend another podcast series from the BBC World Service. The Inquiry. One pressing question from the news and current affairs team, four expert witnesses and some challenging answers. Check it out.
