Fire up the money printer
On the Song Dynasty, the Great Depression, and the millennial anniversary of printed currency
It took several thousand years of organizing before human civilization came up with coined money around 1,000 BC. It's hard to do anything that looks like exchange without some medium for counting, and coins are a reliable solution. But coins, in order to be durable, have historically been made from the ranks of materials with some intrinsic value. Durability itself is a valuable characteristic -- which is at least part of the reason it costs 11 cents to mint a quarter and 2.7 cents to mint a penny.
■ But even after coinage came out, it still took another two millennia before paper currency came into being. Paper currency has advantages over coinage, to be sure, starting with production costs: It costs 2.8 cents to print a dollar, or almost exactly the same as it costs to mint a penny.
■ It is believed that China's Song Dynasty was the first government to introduce a paper currency and make it the only legal tender. Paper money invites two high-risk forms of abuse, from two different sources: Counterfeiting and inflation. The authorities have every reason to use the long arm of the law to discourage counterfeiting (which is how we originally got the U.S. Secret Service).
■ Inflation, on the other hand, is prevented by discipline, market forces, and improved knowledge. The United States abandoned (rightly) the use of an asset-backed currency a long time ago, so the discipline has to come from a combination of political independence and public-mindedness on the part of the Federal Reserve. Market forces weigh in on a minute-by-minute basis (just search the news for "Market reaction to the Fed").
■ But on this millennial anniversary of paper currency, we ought to celebrate the considerable progress that has been made in the study of macroeconomics -- and the huge impact that improved knowledge has on overall human well-being. Make no mistake about it (and the Federal Reserve doesn't): Poor management of the money supply made the Great Depression far more painful than it should have been.
■ We've had multiple enormous challenges to the world economy in the last 25 years, and there has definitely been economic pain along the way. What hasn't been celebrated (quite as much as it should have) is just how much the improved knowledge of economics has reduced the pain that could have been. A lot more remains to be learned before the 2,000th anniversary of paper currency rolls around.
