Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Asset Bubbles Tend to Crash with a Vengeance - 29th July 16
Retirees Are Risking Their Life Savings on Junk Bonds - 29th July 16
The Next Recession is Coming - Expect Around 0% Returns for the Next 7 Years - 29th July 16
SPX is Shaking and Rolling - 29th July 16
Stock Market Insiders Are Secretly Selling, Cycle Top Next Month - 28th July 16
FOMC Interest Rates and Their Impact on the US Economy - 28th July 16
The State Of The Economy - 28th July 16
Elliott Wave Crash Course - 3 Ways the Elliott Wave Principle Enhances Your Trading - 28th July 16
Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure Debt Deflation? - 27th July 16
Monetary Zika - The Insidious Nature of Credit Expansion - 27th July 16
Gold and Pork Bellies - 27th July 16
Silver Is Insurance Against The Worst Part Of This Depression - 27th July 16
Don’t Buy The SPX Hope Stock Market Rally! - 27th July 16
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

The Fate of Paper Money, Fiat Currency

Currencies / Fiat Currency Jan 07, 2009 - 10:22 AM GMT

By: Mike_Hewitt

Currencies

Best Financial Markets Analysis Article"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 Hyperinflation
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 Feb 23, 2007 it now takes 86.2 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 pegged at 24.75 grains of gold. There are 480 grains in a troy ounce. Thus it took 19.4 US dollars to purchase a single troy ounce of gold. As of Feb 23, 2007 it takes nearly 863 US dollar to purchase that same troy ounce of gold, representing a 97.8% 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 .

By Mike Hewitt
http://www.dollardaze.org

Mike Hewitt is the editor of www.DollarDaze.org , a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies.

Disclaimer: The opinions expressed above are not intended to be taken as investment advice. It is to be taken as opinion only and I encourage you to complete your own due diligence when making an investment decision.

Mike Hewitt Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife