1493_ Uncovering the New World Columbus Created - Charles C. Mann [77]
This kind of external pressure has no impact on fiat money. With fiat money, the government has near-complete control over the money supply; it determines how many banknotes are needed and instructs the mints to print them. In theory, politicians can expand or contract the money supply to foster better economic conditions.
Fiat money’s greatest defect is the same as its greatest strength: the government decides how many banknotes to print. After introducing paper bills, Song emperors made a stunning discovery: they could buy things simply by stamping patterns of ink onto pieces of paper. For several decades the strategy was successful. As the use of paper money expanded throughout the empire, the nation needed to increase the supply of paper bills, and the emperor’s outlays were absorbed in the overall rise. In the early thirteenth century the emperor decided to fight enemies in the north—first the Jin, then the Mongols. To pay for supplies and troops, he turned the printing presses on “high.” Inflation was the result. The Song lost to the Mongols before they could set off monetary catastrophe. The Mongols, who became the Yuan dynasty, issued their own paper money—lots of it. To them belongs the honor of inventing hyperinflation. By the 1350s Yuan paper money was practically worthless. In the next decade the dynasty fell to the Ming uprising.
Upon taking the throne, the first Ming ruler, the Hongwu emperor, ordered that new coins be issued in his name—no more worthless paper bills! Alas, the Hongwu emperor discovered that the empire had nearly exhausted its copper mines. Naturally, the price of copper rose; bronze coins ended up costing more to produce than they were supposed to be worth. It was as if every penny cost two pennies to manufacture. Unsurprisingly, not many coins were issued. Ming coins became rarities, so rarely seen that businesspeople hesitated to accept them—merchants had too little experience with the coins to know whether they were genuine or counterfeit.
Quickly the Ming dynasty, like its predecessors, discovered the virtues of an active printing press. Again inflation exploded; the value of the paper bills fell by roughly 75 percent in about a decade. The Hongwu emperor responded by refusing to produce any more coins. Force people to use paper bills—that was the idea. It didn’t work. Shutting down the mints increased the scarcity, and hence the rarity, of the new coins, further eroding their value as currency. It also pushed up the value of old coins, which people trusted and understood. And it dramatically increased counterfeiting. The fake coins were for the most part easily distinguishable from real ones. But merchants were so desperate for some way for their customers to pay them that they accepted the counterfeits anyway, although they demanded a premium.
As businesspeople snatched up all the old and counterfeit coins they could find, the value of paper bills continued to fall. In 1394 the government banned the use of its own coins—a policy that “flouted economic realities,” wrote von Glahn, the UCLA historian, in Fountain of Fortune (1996), a fine history of Chinese money that I have been drawing upon here. As one would expect, the policy failed. The emperors kept trying, prohibiting coins in 1397, 1403, 1404, 1419, and 1425. Every time the ban failed, the emperors would again officially permit coins to circulate—until the next ban. Meanwhile the Ming kept printing paper notes at inflationary rates. All of this may sound completely unhinged, and it was. In the feud- and faction-ridden Ming court, government policies