Paper Money

A substitute for coins turned into a passport for globalization

Blame it on paper currency. The development of banknotes in China more than a millennium ago accelerated wealth accumulation, deficit spending and credit extension—paving the way for our present-day financial crisis. When Chinese merchants started using paper money in the Tang Dynasty (which spanned A.D. 618 to 907), they could have hardly foreseen such difficulties. At the time, the introduction of notes that could be redeemed for coins at the end of a long journey was a boon.

Paper cut down on traders’ loads, enabling them to transport large sums of money over sizable distances. The practice caught on nationwide in the 10th century, when a copper shortage prompted the emperor of the Song Dynasty to issue the world’s fi rst circulating notes. A string of earlier Chinese inventions— including paper, ink and block printing—made it all possible. When Marco Polo visited the Mongol Empire in the 1200s, he was impressed by Kublai Khan’s sophisticated mints, connecting them to an apparently booming economy. (The explorer did not pick up on signs of the inflation brought on by the rapid printing of notes.) Later, faster circulation of currency allowed European nations to siphon resources out of Asia and Africa, fundamentally altering the global balance of power.

Today paper money means that wealth flows back to the developing world as well. Financial convertibility makes it possible for China to buy up U.S. bonds, financing debts that may never be paid back. But it also escalates the pace of wealth accumulation. Paper currency—and its modern heir, electronic trading—lay behind the recent commodities and housing bubbles, contributing to last year’s financial crash. In today’s recession, things have come full circle. Amid concerns about financial stability, some investors are holding on to precious metals. A backlash against more abstract forms of currency means a return to our economic roots: centuries after our conversion to paper, the price of gold has soared.

Source of Information : Scientific American September 2009