The Fate of Paper Money

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joe2baba
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The Fate of Paper Money

a companion of cm's end of money

 

The Fate of Paper Money

"Paper money eventually returns to its intrinsic value - zero." (Voltaire, 1694-1778)

Paper Money in Asia

The first well-documented widespread use of paper money was in China during the Tang (618-907 A.D.) dynasty around 800 A.D.1
Paper money spread to the city of Tabriz, Persia in 1294 and to parts
of India and Japan between 1319 to 1331. However, its use was very
short-lived in these regions. In Persia, the merchants refused to
recognize the new money, thus bringing trade to a standstill.

Kuan Note

Figure 1. This Kuan note is the oldest known banknote in the world. It was made in China circa 1380.

By 1455, after over 600 years, the Chinese abandoned paper money due
to numerous problems of over issuance and hyperinflation. An in-depth
description of China's first experience with money can be found here.

Paper Money in Europe

The first instance of paper money in Europe allegedly occurred in
Spain in 1438 during a Moorish invasion. A Spanish military leader
issued paper notes to his soldiers that circulated around the city. No
known notes have survived.

In 1574, the Dutch city of Leyden issued cardboard coins made from
the cover of prayer books while Holland was trying to regain its
independence from the invading Spanish.

The Italian city of Candia later issued paper money of different
denominations until a shipment of coins arrived from Venice. All notes
were fully reimbursed.

In 1633, the earliest known English goldsmith certificates were
being used not only as receipts for reclaiming deposits but also as
evidence of ability to pay.

In 1656, the Bank of Sweden was founded with a charter that
authorized it to accept deposits, grant loans and mortgages, and issue
bills of credit.

By 1660, the English Goldsmiths' receipts became a convenient
alternative to handling coins or bullion. The realisation by goldsmiths
that borrowers would find them just as convenient as depositors marks
the start of the use of banknotes in England.

In 1661, the Bank of Sweden became the first chartered bank in Europe to issues notes known as the paper daler.

50-Daler Note

Figure 2. A 50-Daler note from the Bank of Sweden issued in 1666.

By the 1680's, the use of paper money began to take place in other
European countries and the New World. Circulated notes on playing cards
were used in the French colony of Lower Canada. Other colonies soon
developed their own paper notes.

Existing Currencies in Circulation

At present there are 176 currencies in circulation in the world.

Not
all currencies are widely used and accepted, such as the various
unofficial banknotes of the crown dependencies (Isle of Man and the
Balliwicks of Jersey and Guernsey).

The median age for all existing currencies in circulation is only 39
years and at least one, the Zimbabwe dollar, is in the throes of
hyperinflation. The twenty longest running currencies are listed below.

Currency Inception Years of Circulation Status
Pound Sterling (GBP) 1694 315 In circulation
Scotland Pound (SSP) 1727 282 In circulation*
US Dollar (USD) 1792 217 In circulation
Netherlands Guilder (NLG) 1814 188 EURO (2002)
Swiss Franc (CHF) 1825 184 In circulation
Guernsey Pound Sterling (GGP) 1827 182 In circulation*
Mexico Silver Peso (MXP) 1822 170 Destroyed by hyperinflation in 1992
Canadian Dollar (CAD) 1841 168 In circulation
Belgian Franc (BEF) 1835 167 EURO (2002)
Cuban Peso (CUP) 1857 150 In circulation*
India Rupee (INR) 1861 148 In circulation
Manx Pound (IMP) 1865 144 In circulation*
Austrian Paper Gulden (ATP) 1753 139 Replaced for 1:2 Austria-Hungarian Kronen in 1892
Japanese Yen (JPY) 1871 138 In circulation
Haiti Gourde (HTG) 1872 137 In circulation
Swedish Krona (SEK) 1874 135 In circulation
Danish Krone (DKK) 1875 134 In circulation
Spanish Peseta (ESP) 1874 128 EURO (2002)
Peru Sol (PEH) 1864 121 Destroyed by hyperinflation in 1985
Italian Lira (ITL) 1882 120 EURO (2002)

*Not officially recognized or valued outside issuing region.

Below are charts showing the declining value of the two longest
running currencies - the British pound sterling and the United States
dollar, considered to be the most successful paper currencies of all
time.

Purchasing Power of the British Pound Since 1694

The British Pound originally represented one troy pound of sterling
silver back in 1560. Sterling silver is 92.5% pure silver and there are
12 troy ounces in a troy pound. Elizabeth I and her advisor Sir Thomas
Gresham (of Gresham's Law
fame) established the new currency to bring about order created by the
"Great Debasement" of 1543-51 when Henry VIII sought to finance his
costly wars with both France and Scotland.

Paper banknotes were issued shortly after the establishment of the Bank of England in 1694.

As of January 7, 2009 it now takes 81.8 GBP to purchase that same troy pound of sterling silver - a loss of 98.8%!

Purchasing Power of the US Dollar Since 1774

Under the US Mint Act of 1792, the dollar was defined as 371.25
grains of silver. There are 480 grains in a troy ounce. Thus it took
1.3 US dollars to purchase a single troy ounce of pure siver. As of
January 7, 2009 the price of a troy ounce of silver is US$11.22,
representing a 89.5% drop in value!

Currencies No Longer in Circulation

This analysis includes 599 currencies that are no longer in circulation. The median age for these currencies is only fifteen years!2

The following table below groups the fates of these currencies.

Currency was... No. Of Currencies Description
Ended through monetary unions, dissolution or other reforms 184 Voluntary monetary unions such as the Euro in 1999, or creation of the US dollar in 1792.
Ended through acts of independence 94 Acts of former colonial entities renaming or reforming their currency
Destroyed by hyperinflation 156 Currency destroyed through over-issuance by the government.
Destroyed by acts of war 165 Currency deemed no longer valid through military occupation or liberation.
Fate of Currencies

The Second World War saw at least 95 currencies vanish as nations were conquered and liberated.

Hyperinflation is one of the greatest calamities to strike a nation.3 This devastating process has destroyed currencies in the United States, France, Germany, and many other countries.

Recent Expansions to the US Monetary Base

The monetary base comprises of currency in circulation (banknotes
and coins) and the commercial banks' reserves with the central bank.
Recently, there have been unprecedented increases to the bank reserve
portion of the US monetary base.

US Monetary Base

Up until August 2008, the portion of the monetary base that
consisted of bank reserves was between 8 - 12%. In December 2008, that
proportion had risen to 47%! This drastic increase was due largely in
part by the unwillingness of the banks to lend recent 'liquidity
injections' from the Federal Reserve.

The following table shows the increases to the monetary base, as
measured in US$ billions for the last six months of 2008. These actions
by the Fed are responsible for the large spike on the right side of the
above chart.

Date Currency in Circulation (M0) Cash Held as Bank Reserves Total Monetary Base
Jul-08 774.8 71.7 846.5
Aug-08 775.4 71.9 847.3
Sep-08 776.8 131.2 908.0
Oct-08 793.8 338.7 1132.5
Nov-08 806.5 634.6 1441.1
Dec-08 882.0 782.3 1664.3

These massive expansions to the US monetary base increase the
probability of a complete collapse in the confidence of the value of
the US dollar. This shift in sentiment would spark a hyperinflationary
fate to the world's de facto reserve currency.
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Notes

1 The
very first historical use of paper money is believed to have occurred
in 140 A.D., shortly after the Chinese discovery of paper in 105 A.D.
How this money came to an end is not known.

2 Many
of the early paper currencies (likely to number in the many hundreds)
of medieval Asia (China, India, Japan, Korea and Persia) as well as the
majority of paper currencies that existed in China until 1935 are not
included due to lack of historical information.

3 It should be noted that many of the curencies listed as being destroyed by war in this article also underwent hyperinflation.

Published on DollarDaze.org - Jan 7, 2009.

_____

© 2009 DollarDaze

ABOUT THE AUTHOR


Mike Hewitt
Mike Hewitt is the editor of DollarDaze.org,
a website pertaining to commentary on the instability of the global
fiat monetary system and investment strategies on mining companies. His
website also provides a no-cost market data feed service
with up-to-date quotes on currency exchange rates, commodity prices and
major indices. Mike can be emailed at [email protected].

 

 

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: The Fate of Paper Money

Mike Hewitt always seems to provide great grahpics to help make his points.  Unfortunately in this article I think he misses the bigger questions that need to be addressed.

The first question I would submit is what exactly is money?  Is it a store of wealth or a medium for exchange?  Should it be both?

I think Mike is saying that money should be both - but that will cause some problems and in fact, I think it is both impractical and destructive in the way he seems to suggest - a gold backed currency.  There simply is not near enough gold to back a currency.  Paper money is fine if it is implemented properly and it has the advantage of being as plentiful as needed.  Gold is scarce.

I also agree that gold is a good store of wealth, especially in these depressed times.  We are free to take our money and to purchase gold at any time if we think this is a better way to store our wealth.  I personally own gold and silver and prefer to keep it as private as possible - and not rely on the government to issue gold as money. 

Larry 

 

m1bxd's picture
m1bxd
Status: Member (Offline)
Joined: Oct 2 2009
Posts: 9
Re: The Fate of Paper Money

This one came by my inbox today (Feb 11th 2010), I know it's not directly related to the previous posts on this thread, but it does make interesting reading...

Note that the value of the highest denomination euro notes accounts for 58% of the value of euros in circulation at the time of writing, so is broadly comparable. The Bank of Finland say, rather blandly, that the proportion of unexplained transactions that are used for illegal purposes cannot be determined. But it's quite high.

I'm sure we find a better estimate. Let's look at another Scandinavian country, Norway. After Iceland, Norway is the second most cashless country in the world (ie, it has the second highest proportion of non-cash retail transactions). Not only does it have a high card penetration but the number of card transactions per household, already high, is still going up. You couldn't get more electronic. Yet according to a study from one of the Norwegian banks that I was told about, the amount of cash "in circulation" is still going up as well. This is apparently inexplicable.

It's not, of course, and here's why. The authors of the study go on to compare the situation in Finland with not only Norway but also Sweden, and they refer to another study that showed that over the study period (1999-2005) the amount of unexplained cash went from two-thirds of all cash in circulation up to four-fifths. How much of this used for illegal purposes? In Norway, where 71% of cash was unexplained, the estimate was 67%. In other words, almost all of it.

 

The truth is that in the most cashless economies, most of the remaining cash isn't circulating anywhere: it is vanishing into the grey and black economies.

 

What's more, it's difficult to avoid the conclusion that the central banks know perfectly well what is going on. But I don't understand why the law enforcement, taxation and other parts of government aren't giving them more of a hard time about it. On this, there may be some developments to come. At a seminar I attended in London, David Lewis, who is Head of Anti-Money Laundering in theFinancial Crime Unit at Her Majesty's Treasury, said that "the situation with regard to high value notes will improve shortly". I don't know what he meant, and he didn't elaborate, so perhaps there is going to be a pan-European effort to get high-value notes out of circulation. They should start by removing the €200 and €500 euro notes that should never have been issued in the first place.

http://digitaldebateblogs.typepad.com/digital_money/2010/02/unexplained-...

Cheers Mark

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