Introducing a new currency is easy

If you are the Khan, of course.

A Mongolian 500 tugrik note from 2013.

The lovely people from FinTechStage, principally my old friends Matteo Rizzi (who was one of the co-founders of SWIFT Innotribe) and Lazaro Campos (who used to run SWIFT), invited me to dinner with, amongst others, the Minister of Finance for the Grand Duchy of Luxembourg, Pierre Gramenga. This was with a group of local CEOs and it was held on the eve of FinTechStage Luxembourg.

The Minister of Finance for the Grand Duchy of Luxembourg. And me.

Since I found myself sitting next to Pierre, when I was asked to give a few words about the potential for SLTs to the assembled CEOs I decided to put my prepared remarks on the different kinds of shared ledger technologies to one side and talk instead about the way in which Ministers of Finance can change the course of history to lead into a point about transparency and jurisdictional competition and the role of new technology in forming new (and better) financial markets. I used the example of the Mongol Empire to make my point. Now, I realise that they slaughtered tens of millions of people and laid waste to vast swathes of the world, but I was inviting the audience to consider their fiscal and monetary policies rather than their merciless murdering rampage across Asia.

When Genghis Khan took control of China in 1215, his fiscal policy was confused. His pacification plan was to kill everyone in China, no small undertaking since China was then, as now, the world’s most populous country. Fortunately, one of his advisers, a man who ought to be the patron saint of Finance Ministers everywhere, Yeliu Ch’uts’ai, pointed out that dead peasants paid considerably less tax than live ones, and the plan was halted.

In Michael Prawdin’s “The Mongol Empire: Its Rise and Legacy” he says that “if we reckon the importance of a statesman by the number of human lives he save from destruction, Yeliu-Ch’uts’ai was certainly one of the greatest statesman the world has ever known”.

Under Pax Mongolia, China prospered.

In 1260, Genghis’ grandson Kublai Khan became Emporer and determined that it was a burden to commerce and taxation to have all sorts of currencies in use, ranging from copper “cash” to iron bars, to pearls to salt to specie, so he decided to implement a new currency.

(The Chinese currency was referred to as “cash” by the English when they came across it. It’s a wonderful linguistic intersection, because the English word “cash” comes from the Middle French “caisse”, meaning a box or chest. But the local South Asian word for the metallic circulating means of exchange was the homophone - to English ears - derived from the Tamil kāsu, a South Indian monetary unit. So “cash” it was.)

The Khan decided to replace copper, iron, commodity and specie cash with a paper currency. A paper currency! Imagine how crazy that must have sounded! Replacing stuff with printing!

This must have been as shocking to contemporaries as the idea of digital currency is today. It was certainly a shock to Marco Polo, who wrote about it in his travels, saying:

With these pieces of paper they can buy anything and pay for anything. And I can tell you that the papers that reckon as ten bezants do not weigh one.

I cannot resist quoting him further, because I want you to see how amazing the idea of paper money was to the traveller from Europe. He described how paper was made, much in the same way that I might begin a discussion about Bitcoin by explaining public key cryptography.

The emperor’s mint then is in this same city of Cambaluc, and the way it [money] is wrought is such that you might say he has the secret of alchemy in perfection, and you would be right. For he makes his money after this fashion. He makes them take of the bark of a certain tree, in fact of the mulberry tree, the leaves of which are the food of the silkworms, these trees being so numerous that the whole districts are full of them. What they take is a certain fine white bast or skin which lies between the wood of the tree and the thick outer bark, and this they make into something resembling sheets of paper, but black. When these sheets have been prepared they are cut up into pieces of different sizes.

The then goes on to explain how these pieces of paper begin to obtain their value, much as I might explain proof of work and the concept of double-spending prevention.

All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver; and on every piece a variety of officials, whose duty it is, have to write their names, and to put their seals. And when all is prepared duly, the chief officer deputed by the Khan smears the seal entrusted to him with vermilion, and impresses it on the paper, so that the form of the seal remains imprinted upon it in red; the money is then authentic. Anyone forging it would be punished with death. And the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasure of the world.

He then goes on to explain the tremendous advantages to China from the new payment system, primarily those relating to trade, and how the paper money is set as a currency by becoming a unit of account through the state monopoly.

Furthermore all merchants arriving from India or other countries, and bringing with them gold or silver or gems and pearls, are prohibited from selling to any one but the emperor. He has twelve experts chosen for this business, men of shrewdness and experience in such affairs; these appraise the articles, and the emperor then pays a liberal price for them in those pieces of paper. The merchants accept his price readily, for in the first place they would not get so good an one from anybody else, and secondly they are paid without any delay. And with this paper money they can buy what they like anywhere over the empire

I pointed out that Kublai’s monetary policy was refreshingly straightforward and robust. If you didn’t accept his money, he would kill you. Naturally, in a short time, the new single currency was established and paper money began to circulate instead of gold, jewels, copper coins and metal bars. I wasn’t suggesting that Luxembourg institute capital punishment for those refusing to accept Bitcoin, but I was suggesting that a juridiction such as the Grandy Duchy might want to explore creating new kinds of financial markets founded on shared ledger technologies and the ambient accountability that might, as my colleague Salome Parulava puts it, dissolve the boundaries between auditing and compliance to the form a better, cheaper and safer market for asset management, transfer and settlement.

I think it went down OK.

Dave Birch gave one of the the most hilarious and original talks I ever listened to.

Matteo is much too kind, but I hope that I helped people to think about shared ledgers, digital currencies and regulatory competition in a useful way.