The History of Paper Money – Barebones Economy – Extra History – #3


In the last episode, we got to the ad hoc, unofficial beginnings of paper money. This week, we’ll look at some of the rogues’ gallery that really created the intellectual argument for adopting paper money in some more official way. When we last left off in England in 1640, the first unofficial banknotes were starting to circulate But in the early 1660s in Stockholm, the first semi-official banknotes, the first banknotes from what we might think of as a central bank, the first banknotes that really started to replace a hard currency. Began to appear But with those banknotes, come the problem of unregulated Fractional Reserve Banking Remember how we mentioned that the Goldsmiths of London realized that using banknotes, they could actually lend out more money than they had gold or silver to cover? Well in Stockholm, they really went to town. Soon, there were so many banknotes out there, that people couldn’t help but notice, And as soon as people noticed, everybody rushed to the bank to get their banknotes turned back into coins. Which of course they couldn’t do. And there goes the Swedish economy. So, clearly there were still some kinks to work out with these newfangled banknotes. Now let’s hop back to England, once Civil War, and half a Dozen other wars After Charles I so politely jump started this whole banking thing which that forced loan of his. The year is 1695, the English have just gotten themselves kicked around in the Channel by the French. And if we know anything about history, we know that that will never do. So, the English established a Central Bank, the Bank of England To raise money and to help the government pay to refit the navy As part of this, they issued banknotes, but the idea of banknotes, and their role in the economy had been a topic of debate in England for a few years. Which leads us to the first of our roguish economic theorists. And yes, this is his real name – Nicholas If-Jesus-Christ-Had-Not-Died-For-Thee-Thou-Hadst-Been-Damned Barebone Who, for obvious reasons went by the name – Nicholas Barbon Nicholas Barbon’s father was Praise God Barebone (Yes really) Who will surely make an appearance in episodes covering the English civil war Nick Barbon started his career as a doctor, getting his degree from the University of Utrecht And joining the Royal College of Physicians But this trade had too much saving people, and too little amassing vast quantities of wealth. So Nicholas turned instead to Real Estate and Construction. Luckily, he had in a break, when, in 1666, the Great Fire of London swept through and incinerated about 13,000 homes and left about 1/6 of the city homeless Hussah! This of course was seen as a great opportunity by Barebone who will rebuild most of London And even very illegally, reshape it. If you’ve ever been to the Western parts of the Strand or Bloomsbury Those areas basically exist because Barebone didn’t listen to any of the restrictions that said that you couldn’t build between London and Westminster After all, as he saw it, that’s where the open land was And where easier to build? I mean, yeahhhhhhh, it’s open because it’s illegal to build there, but what are they gonna do? Tear down the houses you just built? They’re already built. Deal with it. And from there, the sky was the limit. Barebone at first got into the reputable business of selling fire insurance in a town that had just burnt down After that, he realised that he could invent the mortgage, I mean, I can’t say that he was absolutely, absolutely, the first person to really invent the modern mortgage, but he certainly was the first major player to do so in England. He created the National Land Bank. And began to issue loans secured by people’s homes or properties. He followed that with a few stint in Parliament, largely to avoid prosecution. And then he retired to write some books. And it’s really the books that we’re interested in. And the thoughts he put in them. Because while I’ve been joking about his wild and rapacious greed, he was highly intelligent. And it’s kinda hard to write him off as evil. All of these things he did actually ended up having positive effects. And his writing sort of shows that he knew that. Insuring people against fire provided him with a guaranteed profit, but also created a great deal more stability for the English economy. Fires were still a major issue, but no longer would they be a massive economic displacement. Instead, everybody would put some money into the pot, to bail out whoever lost their home or trade to a fire And he would skim a little from the top Great for the economy! And mortgages? While we might today that it’s the bank’s way of keeping us down, so much of England’s wealth was locked up in Real Estate that it was a huge drag to the national economy. When people bought a house, that money just stayed locked up in that house It didn’t circulate through the economy, it didn’t help to finance businesses, it just sat there. Until somebody generations later decided to sell it. But with the idea of the mortgage, the single biggest asset that most people owned was now freed up to help drive the economy Instead of the sellers simply getting a pile of cash, and the buyer getting an unspendable house, the mortgage freed up that value. You could now spend your house and live in it too! Meaning that that money could circulate through the economy again and again. And Barebone was also, of course, one of the first people to decouple morality and spending Which totally sounds evil, I admit, but up until this point, a lot of the writing on money was written by the Church Basically arguing that everybody live the simplest life possible. And that’s probably good advice, in a lot of ways, but it doesn’t make for a dynamic economy. Barebone argued for fashion and innovation, because they get people to buy new goods before they fully consumed the previous goods, thereby, creating demand, And while we’re not to Adam Smith yet, The basic concept that demand creates supply and grows the economy is there in Barebone’s work. But for us, his most important work is probably his arguments against Mercantilism Mercantilism was the driving political and economic theory in most of Europe, in Barebone’s day. Basically, it sort of saw nations as being in a state of perpetual economic war. The goals for any nation was to get as much literal gold, and silver as they could for itself. And try not to give any to anybody else. In a broader sense, the object was to have your state, be self-sustaining. Importing as little as possible, while exporting as much as you could. Colonies existed to feed the mother country, and weren’t allowed to trade with any country other than their colonial power. And when imports had to be made, the goal was to only import raw materials, so that they could be turned into more valuble, finished goods in your country. And while today, we see a lot of reasons why every country trying to produce every type of good is a terrible idea, In some ways, mercantilism makes a lot more sense when you think of economies based on commodity money, like gold or silver. After all, if your entire economy is based on gold and silver, then your economy could literally only be as big as the amount of gold and silver you have. While many were starting to see this dilemma, Barebone cut to the heart of it. He basically said that even gold and silver don’t have a innate value. They are just worth whatever the market values them at. So instead of stockpiling more gold and silver to grow your economy, why don’t you just get rid of gold and silver entirely? and move to paper money? But these ideas of Barebone’s are only the beginning of the intellectual ground work that will see a world accept slips of paper in exchange for a loaf of bread, a cell phone, or a house. Join us next time and we will witness somebody else try and put their own theories of paper money into practice. On the grandest scale.

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