1493: Money, Money, Money
Strange stuff, money. It’s basically a promise that something (shells, metal coins, colored paper) has value that can be used to exchange for something else of value (food, building supplies, clothing, iPads). The advantage of money is, compared to most goods, it’s portable and long-lasting.
In 1493: Uncovering The New World Columbus Created, when Charles C. Mann shifts his attention from the Atlantic to the Pacific post-Colombian trade, he begins by talking about money—because, in an accident of history, Spanish galleons arriving in Manila in the late 16th century were, from the Chinese perspective, full of money. Mann begins with a brief historical overview of money in East Asia:
“In 1161 the Song dynasty introduced what would be come the first modern paper currency: the huizi…the first nationwide, state-printed banknote. It was denominated in terms of bronze coins: the lowest-value note was worth two hundreds coins and the highest was worth three thousand. (The first European banknotes appeared in 1661, five centuries later.)”
The advantage of the huizi was obvious. It’s a lot easier to carry around “one” huizi than two hundred bronze coins. The huizi notes worked so well as money that Chinese merchants began exporting bronze coins to Japan. “Within a few decades of their creation, huizi notes were decoupled, as a practical matter, from coins; no matter what the bills claimed, they couldn’t be redeemed for bronze. They had effectively become what economists call fiat money.“
Fiat money has value because a government says individual pieces of colored paper have a particular value (e.g., dollars, euros). The principal danger of fiat money is if the government prints too many pieces of colored paper, it can set off an inflationary spiral in which a dollar (or euro, or huizi) buys less wheat (or rice or leather or wood) than it did last year (or month, or week).
This is what happened in China. Over the centuries, as the Song dynasty was replaced by the Yuan (1279) which in turn fell to the Ming (1368), paper currency—because of repeated inflationary spirals—became effectively useless and the economy reverted to commodity money (money that has intrinsic value, e.g, precious metals). Commodity money has its own problems, as Mann explains:
“From a government’s point of view, commodity money is problematic, because the government does not fully control the money supply—the nation’s currency is at the mercy of random shocks. For example, at the time of Colon’s voyages cowry shells were used as currency from Burma to Benin.* The Europeans shipped in vast quantities of shells from the cowry-rich Maldive Islands, in the Indian Ocean. Governments throughout the region were overwhelmed. A financial system that had been in place for centuries disintegrated in a flash.”
By the mid-16th century, both paper and bronze currency in China were so devalued that merchants effectively created their own non-governmental silver-based currency. (Silver, being rarer, was much more valuable than bronze.) Eventually, “(i)n a series of edicts, Beijing reordered the tax rolls and ordered the citizenry to pay an ever-increasing share of their taxes in raw silver, rather than in kind. By the 1570s, as the Wanli (emperor’s) reign began, more than 90 percent of Beijing’s tax revenue arrived as lumps of (silver).”
But silver was in short supply in China, so Chinese merchants sailed throughout the Pacific and Indian Oceans, setting up trading posts—in search of profitable trade, yes, but most especially in search of silver.
Imagine the shock of the Chinese traders in Manila when—after a 7 year voyage to and throughout the southwest Pacific Ocean—Miguel Lopez de Legazpi’s galleons arrived there in 1571 filled with silver. It would be as if beings from another solar system arrived on Earth today with cargo holds full of $100 bills, wanting to trade them for fancy clothes.
As Spanish silver flowed out of the mountains of Ecuador and across the world’s oceans in the ensuing decades, it would continue to have an enormous impact—creating great fortunes, financing the growth and reach of European power, and ultimately destabilizing currencies, governments and societies across Asia and Europe.
*”To those accustomed to metal coins, the idea of using shells for money may seem primitive. But they had a signal advantage: unlike the era’s coins, which were often debased or faked, shells could not readily be altered or counterfeited.“