The Fate of Paper Money

This piece is heavily extracted from work of Mike Hewitt, the editor of DollarDaze.org, and the reproduction is with his permission.

His key argument is that paper money that we are having in circulation now will come to an end, like all historical stories testified below:-

The first well documented widespread use of paper money was in China during the Tang (618-907 A.D) dynasty, then spread to the city of Tabriz, Persia in 1294 and to parts of India and Japan. However, its use was very short-lived in this region. In Persia, the merchants refused to recognize the new money, thus bringing trade to a stand-still. By 1455, after 600 years, the Chinese abandoned paper money due to numerous problems over issuance and hyperinflation.

And in the case of Europe, the first instance of paper money allegedly occurred in Spain in 1438 during a Moorish invasion, but no known notes have survived.

At present, there are 176 currencies in circulation in the world and the longest running currencies are (i) Pound Sterling (inception in 1694), US dollar (inception in 1792, Netherland Guilder (inception in 1814) and others, but of these currencies, we are seeing the declining value of the British Pound sterling and the US dollar – considered to be the most successful paper currencies of all time.

On the other hand, there were 599 currencies that are no longer in circulation that either ended through monetary reforms, acts of independence, acts of war or destroyed by hyperinflation. The Second World War saw at least 95 currencies vanished as nations were conquered and liberated.

Of recent times, we see strong expansions to the US monetary based. Up until August 2008, the monetary base growth was between 8-12% and in December 2008, that proportion had risen to 47%! – part by the unwillingness of the banks to lend recent ‘liquidity injections’ from the Federal Reserve.

Essentially, these massive expansions to the US monetary base increases the probability of a complete collapse in the confidence of the value of the US dollar as it could spark a hyperinflationary face to the world’s de facto reserve currency.