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disasters, extreme social upheaval and always end in economic collapse. This era, however, could be called “the era of debt-based paper money and credit”. Paper Money Collapse: The Folly of Elastic Money [Detlev S. Schlichter, Thomas Mayer] on *FREE* shipping on qualifying offers. Explore the. When stability returned, the sum of paper marks needed to buy a gold .. monetary collapse that any industrialised nation has ever known.

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Paper money collapse: the folly of elastic money and the coming monetary breakdown The evils of this deluge of paper money are not to be removed until our. Paper Money Collapse: The Folly of Elastic Money, Second Edition challenges the mainstream consensus on money and monetary policy. Explore the inevitable collapse of the fiat monetary system Paper Money Collapse: The Folly of Elastic Money, SecondEdition challenges the mainstream .

Paper Money Collapse: The Folly of Elastic Money, Second Edition challenges the mainstream consensus on money and monetary policy. While it is today generally believed that the transition from 'hard' and inflexible commodity money such as a gold standard to entirely flexible and potentially unlimited fiat money under national central banks allows for superior economic stability, Paper Money Collapse shows that the opposite is true. Systems of highly elastic and constantly expanding money are not only unnecessary, even for growing economies, they are always extremely destabilizing. Over time, they must lead to substantial imbalances, including excessive levels of debt and distorted asset prices, that will require ever faster money production to sustain. Ultimately, however, there is no alternative to a complete liquidation of these distortions.

If the address matches an existing account you will receive an email with instructions to retrieve your username. Skip to Main Content. Paper Money Collapse Editor s: Detlev S. First published: Print ISBN: All rights reserved. About this book Explore the inevitable collapse of the fiat monetary system Paper Money Collapse: The updated second edition incorporates: A new introduction and an extended outlook section that discusses various "endgames" Responses to criticisms, alternative views, and a critical assessment of 'solutions' Comments on recent policy trends, including attempts to exit the 'easy money' policy mode An evaluation of new crypto-currency Bitcoin Paper Money Collapse: Free Access.

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Email or Customer ID. Forgot password? Old Password. New Password. One thing that should not be overlooked is that both the copper coin and the copper cash were but one part of the circulating currencies that were based on the wen unit. The copper cash note denominated in wen, the so-called qianpiao, also circulated alongside the metallic currencies. Nantong Lin Jubai Conversion into liang is based on the average annual exchange rate.

Table 5. Printing provincial paper money in place of the copper coin was effective in subduing the increas- ing demand for copper cash. The Hubei provincial government was the most successful issuer of paper money and around it printed copper cash notes to a total value of three times its copper reserves Xie In contrast to this success, the copper cash notes that were issued by the Hubei provincial government before had failed to prevail in the market.

The main reason for this was that these copper cash notes lacked convertibility and this, in turn, was due to the copper cash famine CIMC The prevalence of provincial paper money had an adverse effect on the acceptability of private copper cash notes that were issued by local mer- chants.

A Decennial Report made by the customs of Shashi, which was located by the Yangzi River in the western part of Hubei province be- tween Hankou and Chongqing, pointed out that the official copper cash note circulated at a nominal value of 1, wen whereas the private copper cash note was discounted to wen CIMC The provincial paper money held out well in the trading areas of Hankou until the second half of the s, after which time occurred a decline of copper currency and a revival of private notes Kuroda The driving out of the private copper cash note by the official copper cash note may well have had a significant impact on the economy.

In order to establish whether this was so it is necessary to clarify the circulation mechanism of the private copper cash note and to distinguish between the private copper cash note and the bill of exchange or promissory note. Generally speaking, the private copper cash note was guaranteed permanent con- vertibility into the hard currency, such as the copper cash or copper coin, and its most important characteristic was that its circulation was limited, usually to a certain region or regions.

The complexity and limitations of private copper cash notes can be shown through an example from Shanxi province. In , forty shops in a particular town in Taiyuan county issued their own copper cash notes, the total value of which was estimated at more than , qian, or million wen. However, shops in another town called Jincizhen in the same county, which was only one-and-a-half hours walk away, issued their own copper cash notes. Currency circuits, as defined in this chapter, were typically found in regions that maintained the circulation of certain private copper cash notes.

The dominance of provincial paper money over private notes in Hubei province must have caused some changes to the system of currency circuits. When the Hubei provincial government issued its copper cash notes, it was initially inclined to put the seal of the county of issuance on them.

As well as establishing branches of the provincial mint in the three treaty ports, Hankou, Shashi, and Ichang, the provincial government also set up branches in some centers where peasant commodities were collected, and in other centers local financiers were entrusted with the role of providing branch services. In regions where branches of the mint were established, the official copper cash note soon drove out the private money. As a result, the circulation of the official copper cash note was extended throughout the whole province.

The way in which the sphere of circulation of official paper money expanded can be illustrated through further examples. Xianning was a tea-producing county which was nine hours away from Hankou by steam- ship. There was only one money exchanger Qianzhuang in Xianning and he had no previous experience of making transactions with the exchangers in Hankou. Once the official copper cash note came to prevail, tea mer- chants would take these notes to the money exchanger, who would convert them into copper coins which could be used to purchase tea from the peasants Toa Dobunkai , Vol.

The sphere of circulation of provincial paper money was thus extended through its function of facili- tating the purchase of local commodities that were to be transported to Hankou, the largest port of inland China. Branches of the provincial mint were even established at Xinyang in Henan province and Wuxie in Jiangxi province—towns which, although outside Hubei province, were centers for gathering sesame and hemp that was bound for Hankou.

These are clear illustrations of a process in which a strong demand-pull for currency to pay for peasant produce enabled provincial paper money from Hankou to replace local private copper cash notes. The important point here is that changing economic conditions in early twentieth-century China, particu- larly the increasing export of rural commodities, necessitated the estab- lishment of a mutually acceptable interregional currency in areas linked to Hankou.

In order to transport and trade commodities from those periph- eral regions that had no prior financial linkages with Hankou, a currency that could guarantee some interregional consistency of value was needed. The export value in the maritime statistics excluded most re-exports of goods from other ports such that it can be said that the export values in the table reflect the actual production for export of the northwestern part of Hubei province.

During the period of copper currency appreciation, between and , export values and copper currency quotations in Shashi show a high positive correl- ation with a coefficient of 0.

In contrast, the copper currency quotation and the price of Lake Superior Ingot Copper which reflected international copper price movements do not display a high correlation with a coefficient of only 0. In the case of Nantong in the Lower Yangzi the coefficient is also low. Therefore, it was not the international copper price movement but the demand for copper to conduct transactions involving rural commodities that caused the appreciation of copper currency in China around the turn of the century.

In summary, increasing demand for peasant produce and the need to make payments to farmers, around the turn of the century, caused an appreciation in the value of copper currency. The strong demand of the trading ports for rural commodities enabled provincial paper money to prevail over the local currency circuits and an interregional currency system linked directly with the peasants emerged. Although the impact of trade differed from region to region most provinces then issued their own paper money in an attempt to make seigniorage profits.

Supply-side motivations may have been similar but the strength of demand for the currency differed. It is often said that the demand-pull for local peasant commodities exerted by the major treaty ports originated directly from international trade. However, if that was the case, then the demand for an interregional currency did not stimulate the monetary unification of the Chinese trading ports, rather it promoted the monetary autonomy of provinces with major trading ports—a situation that was conducive to the formation of military divisions by the governors of such provinces.

Stage 2: The start of this second stage can clearly be traced to the outbreak of World War I and the issuance of the Yuan Shikai dollar, although the end year is not so clear-cut.

To understand the changes that took place it is necessary to examine the circulation of money in China in the middle of the s. A survey published by the Shanghai Bank in is invaluable for this purpose Shanghai Bank The survey showed that the Yuan Shikai dollar was already the most widely circulated form of money in every city, except for Dalian where Japanese yen coins and Chosen Bank Bank of Korea notes dominated.

Before World War I, Mexican dollars had circulated at a premium in Jiangnan district, and the Japanese dollar had been the prevailing silver money in use in Amoy and Jiujiang. In the year of the survey, however, both foreign dollars had become minor components of the total money supply.

Another survey in estimated that million silver dollars were in circulation in China, of which million were Yuan Shikai dollars and only 30 million were foreign dollars, with the remainder being accounted for by other Chinese dollars Toa Dobunkai The prevalence of the Yuan Shikai dollar was not limited to areas which had a history of using silver currencies.

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In inland China, silver dollars had not been in general circulation for use as a currency for daily transactions, but by the Yuan Shikai dollar was performing precisely this role. Even in Laohekou in Hubei province, where copper currencies had once been absolutely dominant, the Yuan Shikai dollar came to prevail. By the middle of the s a vast area centered around Hankou, which had traditionally preferred copper currency, had switched to the silver dollar.

A further change was that bank notes began to circulate in regions beyond the treaty ports. As was mentioned in Section 2, bank notes issued by the branches of foreign banks were already in circulation before World War I, but only in the ports where branches of the banks were located.

In contrast, a large proportion of the bank notes in circulation in the s was issued by Chinese banks, especially the China Bank. Moreover, these bank notes began to circulate in towns that were far from the trading ports.

These three changes—the replacement of foreign dollars, the disap- pearance of copper-preferring regions, and the circulation of the China Bank note—were interrelated and tied together by the prevalence of the Yuan Shikai dollar. A simple answer to the question of how so many Yuan Shikai dollars could circulate was that World War I had induced a rise in the international silver price that led to the outflow of silver from China.

The scarcity of silver in China then created a demand for a new silver dollar Miyashita However, although this explanation is not incorrect it is inaccurate and the situation at the beginning of the war must be examined more closely. Prior to World War I, the Mexican dollar was used as a means of payment for exports and was quoted at a higher rate than other dollars.

Demand for export goods was reflected in, and reflected, the value of the Mexican dollar which varied according to seasonal trends.

In the autumn of foreign banks in Hankou, where the Yuan Shikai dollar had not yet begun to circulate, started to suspend their short-term export loans due to the difficulty of selling export goods. Simultaneously, Chinese dollars began to flow into Hankou, gradually driving out the Mexican dollar. In other words, the most important factor underlying the spread of Chinese dollars, including the Yuan Shikai dollar, was the disappearance of the once superior Mexican dollar due to World War I.

Rather than the disap- pearance of the Mexican dollar resulting from the prevalence of the Yuan Shikai dollar, the direction of causality was the reverse with the former resulting in the latter.

Thus, it was the disruption of exports due to World War I that lay behind these changes in the Chinese monetary system. Of course, as the war was mainly fought in Europe it did not affect all the exports from China and some new export items even appeared due to wartime de- mand.

However, one must remember that it was the growth of rural commodity exports that sustained the emergence of provincial paper moneys as interregional currencies. The loss of export markets seriously affected the credibility of paper moneys used in transactions for peasant products and even the currency circuits based on copper in the areas centered around Hankou collapsed after the war.

The point being made here is that for the popularity of interregional currencies to be maintained there had to be continuing external demand for local products, and the loss of such demand meant the death of the currency. Once provincial paper money was no longer able to play the role of linking local products with the trading ports, its credibility was lost.

After World War I, bank notes, especially those with convertibility tied to the Yuan Shikai dollar, began to develop as popular interregional currencies to replace the copper-coin-based provincial paper moneys. China Bank notes were the primary example of this and these notes were at first issued separately by local branches of the China Bank, with each note only being available within the service area of the issuing branch.

Initially, these notes were used as a method of payment that complemented the demand for local currency. However, in the s the role played by the China Bank notes began to expand and this can be illustrated by examining the trade of wood oil in the area bordering the provinces of Hunan and Guizhou.

Hongjiang was a town that was located on the border of Hunan prov- ince, more than km from Hankou. Until about , merchants from Hankou who wanted to purchase wood oil and transport it to Hankou had to take bills of exchange to Hongjian and have them converted into hard currency or notes issued by exchangers there.

However, according to a survey conducted in , merchants by that time no longer needed to make an exchange at an intermediate city. More than , dollars of bank notes had been issued by the Hankou branches of the China Bank and the Communica- tion Bank and were now in circulation in Hongjian.

Furthermore, the Yuan Shikai dollar and notes issued by the Sanjiang branch of the China Bank were also in circulation in Sanjiang, so transactions involving wood oil could thus be conducted solely by using the financial services of the China Bank Kuroda After World War I, the same process progressed through the Yangzi river area and everywhere the circulation of the Yuan Shikai dollar and bank note drove the silver liang and copper currency out of local markets.

The procurement of rural commodities thus facilitated the replacement of native financiers with branches of the China Bank and the decline of native money exchangers was always accompanied by the commence- ment of the circulation of bank notes. Examples of this occurred in the mids in Boxian in Anhui province, a regional center for the shipment of sesame seeds to Shanghai Toa Dobunkai Until the end of World War I, bank notes had only circulated within the borders of the county of the issuing branch.

After the war, the circulation of bank notes expanded greatly and by the end of covered areas well beyond the boundaries of a single province. Finally, after the crackdown of the Wuhan National Government in , bank notes issued by banks in Shanghai began to circulate in Hankou Gongshang Banyuekan Therefore, towards the end of the sec- ond stage of monetary reform the bank note, which had once been no more than a local currency, was instrumental in uniting two large eco- nomic centers—Shanghai and Hankou.

It is necessary to examine the factors underlying this process. Between and , cities across China were struck by financial crises. In traditional China such crises were usually caused by a decrease in silver stocks which tended to destabilize local markets. One of the causes of the crisis that began in was clearly that the international silver price had peaked, not during World War I, but in the period of — The annual average price of British standard silver per ounce in London was forty-eight pence in , and but increased to fifty-seven pence in , and sixty-one pence in US Treasury Department However, there were other causes besides this one and these can be ascertained by looking at the case of Hankou in The crisis in Hankou started in May , a month that marked the beginning of the cotton-buying season.

The end of the war had resulted in the resumption of exports to foreign markets in the spring of and cotton procurement increased the demand for silver dollars.

As a result of these two factors there was a net outflow of silver stocks from Hankou, triggering a financial crisis that lasted until the autumn of that year, at which point the provincial government prohibited the further outflow of silver to other provinces Tsusho Koho The point to be noted here is that even in Hankou, where copper currency had once prevailed, the purchase of peasant produce now also exerted a strong impact on the demand for silver dollars.

The disruption of exports to Europe and the rise of domestic industry during World War I had altered the Chinese pattern of trade and this was a further factor behind the changes in the monetary system. Typical commodities included sesame and raw cotton, and before the war sesame was processed and traded in Hankou for the European market, with the German oil and chemical industries as its most important customers.

A survey conducted before World War I reported that net profit per mu approximately six acres of sesame was fifteen qian 1, wen , in comparison to a net profit of twelve qian from one mu of cotton.

During this period, Hankou was the trading center that linked raw cotton from inland China with Shanghai cotton mills, and Table 5. The survey was conducted again after the war and stated that the net profit from raw cotton cultivation had risen to 16 qian Rinji Sangyo Chosakyoku Vol. There is no doubt that some peasants in the central Yangzi area switched from sesame to cotton cultivation, as is hinted at in the survey. Changing trade patterns, such as those outlined above, dictated changes in the currencies in circulation.

Demand for raw cotton in Shang- hai caused the silver dollar that was in circulation in the Lower Yangzi area to penetrate into the cotton-growing regions of the central Yangzi area.

Further impetus to this process was provided by the collapse of the copper currency circuits during the war. The value of sesame imports from China possibly excludes that via the third countries.

Shikai dollar steadily expanded their spheres of circulation. In the mid- s, notes issued by the China Bank were generally accepted for trans- actions involving raw cotton in cotton trading cities such as Zhengzhou of Henan province Zhongwai Jingji Zhoukan The changes that occurred also had political implications.

Cotton exports, —31 1, piculs Total From From To foreign To domestic Year quantity Hankou Shanghai countries To Japan ports 1, 1, 1, 96 1, 1, 1, 1, 2, 1, 1, 2, 1, 1, 1, 1, 1, 2, 1, 1, 2, 1, 1, 1, 2, 1, 1, 3, 1, 2, 2, 1, 1, 1, 3, 1, 1, 2, 2, 1, 97 1, 2, 72 1, 1, 49 1, Source: National Government in This was in sharp contrast to the first stage which tended to promote the political division of China.

Formalization of the Money Supply and Currency Circuits This chapter has thus far considered two phases of monetary change: On the surface, this created a simmering tension between provincial and central governments, and between traditional financial institutions like the local money exchangers and the new Western-style banks.

Under- lying this tension was the more fundamental conflict of whether or not, in the light of changing demand, the money supply should be maintained by the local currency circuits or regulated by transregional official institutions. Traditionally, central government intervention in monetary affairs dif- fered in degree from time to time.

The issuance of government currency was usually accompanied by a process of adjustment in local markets as they set up their own units of account for monetary circulation.

Local currency circuits in traditional China had no legal basis and no formal geographical boundaries so people were free to establish new units of account for the silver liang and copper currency, and decide on premiums and discounts on hard currencies based on their own assessments. Never- theless, most of the time there was a majority consensus in operation regarding the currencies in use and in order to maintain and stabilize local liquidity people must have abided by some kind of standards, even if these were largely based on laissez-faire principles.

Local markets came to agreements on currency in different ways and with different results. Between and , the desire of provincial governments to gain seigniorage profits led to the overissuance of copper coins which were thus devalued, with the extent of the devaluation varying from region to region.

In the Lower Yangzi River area, a ten- wen copper coin gradually came to be discounted to eight or nine wen, and in the town of Zhujiazhen near Shanghai, native merchants held a meet- ing and came to an agreement that they would count a ten-wen copper coin as nine wen from that day on.

Influenced by the general trend of discounting in Zhejiang province, tea merchants from Huizhou began to discount a ten-wen copper coin to nine wen and they were followed by the pawnshops of the same region.

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In contrast, native rice merchants decided to observe the face value of the coin, possibly under the influence of the chamber of commerce in Suzhou prefecture Huazhong Shifan Daxue Zhouzhuangzhen town in Suzhou also decided to stick to the face value of the copper coins. The above cases show that merchants were flexible in evaluating circu- lating currencies in accordance with the market, and it was usually the currency favored by the majority that came to prevail in the region.

A kind of competitive mechanism was in operation in that when preferences differed merchants had to compete to win over the majority opinion. Local liquidity had been maintained by private copper cash notes and there were few regulations regarding the issuance of these. Whenever and wherever there was a possibility of seigniorage profits, due to a shortage of local currency, increasing numbers of merchants would join in the issuance of notes until profitability was exhausted.

As mentioned above, there were tendencies both to substitute provincial paper moneys for private copper cash notes and to control the issuance of local copper cash notes through the supervision of local chambers of commerce. The latter tendency was reinforced around the time of the collapse of the Qing dynasty in , when many counties xian began to establish cham- bers of commerce.

Some chambers tried to set limits on the issuing of private copper cash notes and declared that any note without their seal could not be circulated.

In some cases these measures were introduced as a means to counter the extraordinary overissuance of privatepaper money thatoccurred after World War I. In other cases the measures were used by local merchants to consolidate their control of the local money supply, within a county or town, and to weaken the economic power of merchants from outside.

The Taiyuan Chamber of Commerce in Shanxi province, for example, appealed in to the newly established county assembly to prohibit merchants in Jincizhen town, a market center in the southwestern district of the county, from engaging in the exchange of silver and copper cash and from issuing private notes in Taiyuan.

Throughout the early twentieth century, the sphere of market transactions was marked by the strengthening of this kind of formalization process. The trend was clearly one of restricting the number of money suppliers, and only allowing members of the chamber of commerce to engage in trade.

The process of transformation of the monetary institutions was charac- terized by a contradiction between forces favoring the formalization process and those favoring the removal of barriers to free entry and trade.

On the face of it, the trend towards formalization won. By the s, most traditional local monetary institutions, such as exchangers, had disappeared. In Shanxi province in , for example, county banks issued paper money with a face value of less than one dollar.

This paper money was directly convertible to the paper money printed by the pro- vincial bank, which was in turn the lender to these county banks. In other words, paper money issued by the higher level institution formed the reserve for local paper money.

By this time people rarely used hard currency, and silver was concentrated in bank or government vaults. For example, people in Shanxi suffered from serious inflation following the overissuance of provincial paper money around , and this was followed by severe deflation. During the defla- tionary period there was not sufficient paper money in circulation to meet market demand and this situation was not rectified until the next inflationary period that accompanied the Japanese military invasion in In summary, the officialization of the money supply succeeded in eliminating the currency circuits that were outside the control of the official institutions, but failed to take over their function of adjusting the discrepancies between the demand and supply for money.

The changing monetary institutions may have strengthened government control, but they destabilized rather than rationalized the operation of the market.

As exports of rural commodities increased, their production gradually shifted and became concentrated in large trading ports. As a result, an urgent need arose for a new interregional currency and this explains why provincial paper moneys were successfully circu- lated before World War I, particularly in provinces that had large trading ports such as Hankou. However, the provincial paper currencies lost their base when exports were disrupted during World War I, and the import- substitution-based industrialization of the interwar period led to their replacement with widely circulating bank notes.

The transformation this time was more fundamental in that the currency circuits, which had long maintained local liquidity, had finally been eliminated. This transformation was achieved through a pro- cess in which rural commodities were supplied by local markets to trading ports—both for foreign and for domestic markets—accompanied by the issuance of currencies by banks and other official institutions.

However, although the new currencies issued were convertible, they were not flexible enough to deal with the fluctuating demand for money, a function once carried out by the now defunct currency circuits. If the horizons are broadened, similar processes can be seen worldwide.

At the local market level there were several instances of struggles between local currency circuits and convertible currencies controlled by formal institutions. Cowries, like copper cash, were bulky and small in value and the local markets in West Africa maintained their own units of account. However, in the early twentieth century, silver sterling coins and other subsidiary coins made of nickel gradually replaced cowries and other local moneys.

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