It happened today - July 16, 2016

On this date in history the modern banknote was born. On July 16, 1661. In Sweden. Where it promptly died. But it’s very hard to kill an idea, even a dangerous one.

Don’t get me wrong. I think banknotes are good. I try to collect them and I’m not all that fussy about denomination or even nationality. If you have some you’re not using, you know where to find me. And it’s fascinating the way that they evolved from promissory notes with a particular name on them into generic stores of value.

People were understandably reluctant to lug large quantities of gold around with them on their way down dangerous roads to a business deal. So they deposited the actual specie with reputable merchants in return for a piece of paper that said the buyer they were dealing with could bring it back and get the gold. But that meant the buyer had to come and get the gold then limp back down the road and hope the robbers were having a nap. It would be far more convenient if it just said “will pay to the bearer” and then it could circulate from hand to hand.

Mind you one drawback is that a “negotiable” banknote is, like the original gold, worth stealing. The other is that especially if it circulates for a while you can’t be all that certain that the original gold is still in the hands of the reputable merchant or indeed that he (or she) is still alive, in business, solvent etc. Which is where things get tricky fast.

The original Swedish issue of banknotes happened because common coins were made of copper there and an influx of copper forced the mint to produce increasingly large and inconvenient pocket-ripping coins to maintain their value relative to silver. So people started preferring “receipts” for their copper to hauling the actual stuff around and the Stockholms Banco was happy to oblige. Really happy. So happy they were soon churning out far more receipts than there was actual copper. Three years later people called them on it and the result was pretty much bankruptcy all round.

Unlike Stockholms Banco, the banknote rose again. It was just too convenient. And as it did, so did prices, because inflating the money supply was also just too convenient. Indeed, I sympathize with “goldbugs” and other hard money advocates who think it’s essential to have paper money firmly tied to specie. The problem is that (a) it’s not really obvious that the amount of gold available is rationally related to the amount of currency appropriate to the economy (b) it’s not obvious that gold is, as it once was, so incredibly valuable that anyone will take it in an emergency and (c) as the original history of the banknote shows, it’s a mistake to think of “currency” as a rigidly defined category that will stay put.

No matter what you say about actual physical dollars, banks will extend lines of credit, credit card companies will permit purchases without cash on the barrel, stores will offer installment plans, companies will extend one another credit and in a thousand ways they will manage to carry out transactions with the reasonably credible promise of payment in the near term rather than immediately.

So whatever you do with banknotes, the market will find a way. But there are things you should definitely not do with banknotes. And predictably it’s about the first thing people did with them.