Guest Post: China, Inflation & Gold: China Created Paper Money And Paper Money Then Created Inflation

Tyler Durden's picture

From Darryl Robert Schoon of 321 Gold

China, Inflation & Gold: China Created Paper Money And Paper Money Then Created Inflation

Ralph T. Foster in his invaluable book, Fiat Paper Money, The History and Evolution of Our Currency, writes that paper money made its first appearance in Szechwan, a remote province of China early in the 11th century.

Because of a shortage of copper coins,
provincial officials had begun circulating iron coins; but the
difference in value and weight between the two metals caused unexpected

As Foster writes: [housewives needed] one and one-half pounds of iron [coins] to buy one pound of saltPaper
was the answer. People began to deposit their iron money in money shops
and exchanged deposit receipts to transact business

The money shops’ deposit receipts then
began circulating as money. But the money shops soon issued more deposit
receipts than their supply of coins and by 1022, confidence had eroded in both the notes and the supporting iron money [and] government authorities closed the private note shops.

When the Chinese government intervened,
the government quickly discovered the advantages paper money - at least
to the issuers. The Sung dynasty immediately banned the issuance of
paper notes by private money shops and on January 12, 1024, the Sung court directed the imperial treasury to issue national paper money for general use.

In the beginning, the imperial treasury
backed its paper notes with cash coins equal to 29% of the paper money
issued. Eventually, however, the Sung, like each succeeding dynasty,
would print far more money than it actually possessed in backing.

The consequent loss of confidence in paper money caused Chinese scholars to
question the nature of money...Ye Shi (1150-1223) spoke out against
excessive amounts of what he called “empty money” when he observed how
paper inflation hurt the
economy; and scholar Hu Zhiyu (1127-1295) concluded
that only backing gave paper value and blamed the retreat from
convertibility for the loss of public confidence.. paper money, the
child, is dependent on precious metals, the mother. Inconvertible notes
are therefore “orphans who lost their mother in childbirth”.
(page 19)

For the next 600 years, succeeding
dynasties would each attempt to utilize the advantages of paper money
and avoid its disadvantages. Not one dynasty was able to do so. All
attempts to use paper money ended in runaway inflation and dynastic

By 1661, China finally learned its lesson
and the new Qing dynasty officially outlawed paper money. Regarding
China’s 600 year experiment, Foster writes:

Over the course of 600 years, five
dynasties had implemented paper money and all five made frequent use of
the printing press to solve problems. Economic catastrophe and political
chaos inevitably followed. Time and again, officials looked to paper
money for instant liquidity and the immediate transfer of wealth. But
its ostensible virtues could not withstand its tragic legacy: those who
held it as a store of value found that in time all they held were
worthless pieces of paper.
(page 29)

Today, almost 1,000 years after paper
money first appeared and 350 years after China banned its use, China’s
is again issuing excessive amounts of paper money; and, once again,
paper money’s initial prosperity is about to give way to inflation and
economic chaos in the celestial kingdom.

Southern Weekly, a Chinese language publication, recently noted: China
has not only been the country that prints money at the fastest rate but
also been the country with the largest money supply in the world in the
past decade. China’s M2, a broad measure of money supply, was up 19.46%
at the end of November from a year earlier...This compares with 3.3%
and 2.5% of annual M2 growth in the US and Japan respectively over the
same period…

China's money supply, M2-to-GDP ratio over
the past decade is the highest in the world. The nation with the
longest history of excessive money printing and consequent inflation has
clearly forgotten its past. The past, however, has not forgotten China.


Asian nations, China and India in
particular, have a long history with gold. Precious metals as a hedge
against chaos is deeply embedded in Asian cultures and when chaos takes
the form of inflation, gold is the default hedge; and, today, inflation
is on the rise.

China raised interest rates for the
third time since mid-October ahead of a report forecast to show
inflation accelerated to the fastest pace in 30 months.
- February 8, 2011, Bloomberg News

This has profound implications for the
price of gold. As inflation continues to increase, the buying of
physical gold by the Chinese will send the price of gold skyrocketing.
In fact, it has already begun.

On February 2nd, the Financial Times reported: Fears
of inflation have also driven demand for gold as a retail investment…
Precious metals traders in London and Hong Kong said on Wednesday they
were stunned by the strength of Chinese buying in the past month. “The
demand is unbelievable. The size of the orders is enormous,” said one
senior banker, who estimated that China had imported about 200 tonnes in
three months.

On February 8th, Karen Maley in Australia’s Business Spectator discussed this growing phenomenon in her article, China’s gold tsunami: It’s
not hard to understand the growing Chinese enthusiasm for gold.
Officially, China’s inflation rate was 4.6 per cent in December, but
many believe the actual inflation rate is considerably higher. But
Chinese savers earn a paltry interest rate of 2.75 per cent on one-year
deposits, which means that they face negative real interest rates.

Faced with these dismal returns,
Chinese households and businesses have been pouring money into physical
assets, such as food, real estate, and commodities as a hedge against
inflation. Chinese authorities are now trying to quell property market
speculation by making it more difficult for buyers to get bank finance
for their second and third investment properties, and have begun
experimenting with property taxes in some cities.

This has caused Chinese investors to
turn to gold. According to the Sprott newsletter, China, which is
already the world’s largest gold producer, imported more than 209 metric
tons of gold in the first ten months of 2010 alone. This compares with
the estimated 45 metric tons it imported in all of 2009.

2011 IS HERE

The response to the 2008 global collapse
set in motion an even greater danger - runaway inflation. In 2009 world
governments attempted to offset the global collapse in demand with
historic levels of liquidity. The excessive printing of money has now
led to higher prices.

Prices, especially food prices are rapidly rising. Tyler Durden,, makes this point with stunning clarity: One
of the benefits of America finally seeing what Zimbabwe went through as
it entered hyperinflation, ignoring for a second that the Zimbabwe
stock market was the best performing market, putting Bernanke's
liquidity pump to shame, is that very soon everyone will be naked, once
companies finally realize they have no choice but to pass through
surging input costs. And while some may be ecstatic by the S&P's
modest rise YTD, it is nothing compared to what virtually every single
agricultural product has done in the first month of 2011. To wit: Corn
spot up 7.76%, wheat up 5.63%, Rice up 10.08%, Hogs up 10.16%, Sugar up
5.64%, Orange Juice up 3.33%, and cotton.... up 17.08%. That's in one

Rapidly rising food prices have already
contributed to governments falling in Tunisia and Egypt. Other
governments, well aware of the risk that inflationary food prices pose
to their continued rule, are now stockpiling food to prevent further

This buying will only drive the cost of food even higher: Jim
Gerlach, of commodity brokerage A/C Trading, said: "Sovereign nations
are beginning to stockpile food to prevent unrest." "You artificially
stimulate much higher demand when nations start to increase stockpiles."

"This is only the start of the panic
buying," said Ker Chung Yang, commodities analyst at Singapore-based
Phillip Futures. "I expect we'll have more countries coming in and
buying grain.
- Read here


Even the hardened paper boys on Wall
Street are aware of inflation’s impact on the price of gold. The
meteoric rise of gold in the late 1970s was caused by rapidly rising
prices. In the last decade, however, gold began moving steadily higher
as did all commodities in a disinflationary atmosphere. That, however,
is about to change.

With gold already moving higher, the
increasing inflationary impetus will send the price of gold far beyond
its present price. Gold’s spectacular ascent in the 1970s is now about
to be dwarfed.

Last night, I, Ralph T. Foster, our wives
and another couple had dinner together and the topic turned to the
future price of gold. There was agreement that while its ascent was
certain, gold’s ultimate price was a matter of pure conjecture since the
reference points used to value that price would be virtually worthless
pieces of paper money.

History is the context within which our
present circumstances present themselves. Of late, change has been so
rapid that many believe the past is merely that which preceded the
present. They are wrong.

History is about to repeat itself, albeit
in a new iteration. Paper money’s journey to the west and back again is
about to reach its fatal climax. Paper money’s ten-century drama is
almost over; and while a new and better era will replace it, the
collapse of the present era will be unprecedented in magnitude.

h/t John

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Zero Govt's picture

Yep leave anything in the economy, like money supply, to a bunch of crones in a central planning committee (instead of a free competitive market) and you're 100% guaranteed the outcome... a complete fuk up

thefatasswilly's picture

"Free competitive market" led to the current central planning committee.

"Freedom" is one of the most overrated concepts in existence, because people are far too stupid to hold on to it.

tmosley's picture

White just gets dirty and becomes black eventually, therefore black is better, even if you want white, and white is better in every way.

That's awesome logics right there.

thefatasswilly's picture

. . .

I didn't say that. I only said that "white" is overrated. I didn't even compare "white" and "black."

Don't try to ridicule my logic when you can't even get reading comprehension down.

tmosley's picture

Freedom is overrated because freedom leads to not freedom, therefore, we should pick something other than freedom, ie slavery to start out with.

Excellent logic there.  Don't criticize my "reading comprehension" when you fail at basic logic.

thefatasswilly's picture

. . . please point out where I said that we SHOULD pick something other than freedom. In addition to this, do you really see the world in such black and white absolutes? Do you not realize that there is more than right / wrong? Us / them? Think outside of your fucking western, Christian, black/white mindset, Jesus fucking Christ. You are a simple minded fool.

Once again, ALL I said is that freedom is overrated (and that it necessarily transforms into fascism).

Also, once again, brush up on your reading comprehension, holy shit. Fucking idiot.

Michael's picture

"The collapse of the present era will be unprecedented in magnitude."

Let me repeat myself for the thousandths time;

The complete and total economic collapse of the USA and the rest of the world is a mathematical certainty.

The next collapse will make the great depression look like a picnic.

Michael's picture

What really makes me laugh is when the cretins on cretinNBC drone on and on endlessly with CEOs with their outlook for the future and their five years plans. The world will be going up in flames and they will refuse to deviate from their overlords script.

MSimon's picture

The fundamentals - power plants - agriculture - sanitation - manufacturing capability and capacity - medical capability - are not too bad.


Once the current fiat money is junked for something sounder - or the Fed stops the presses - we will go through some (a LOT) pain and wind up OK. Lots of new technology in the works.

ColonelCooper's picture


The toxins in your prastic rice are making you more berrigerent than normal.  Kindly go fuck yourself.

thefatasswilly's picture

1) If you want to make fun of my English, please consider that my third language is, in all likelihood, better than your first.

2) Can't find any way to attack my ideas, so try to attack my race? Good one, roundeye.

A Nanny Moose's picture

enjoy servitude, sunshine. Since Gummint requires the consent of the??? is our fault. But it still requires consent.

Michael's picture

Freedom's just another word for nothing left to lose.

Zero Govt's picture

Freedom is what you make of it, authority is what others want to make of you

Insert witty title's picture

Hi willy,

I think you would enjoy Hayeks 'The Constitution of Liberty' because in the early chapters he explains beautifully how freedom is important NOT because everyone is going to take advantage of it, probably for the reason you lay out in your post.

However Hayek proposes that we need freedom because ALL of society benefits from only a few individuals taking advantage of it. The freedom to think new thoughts, try new things, introduces innovations into society that EVERYONE benefits from, even if not everyone takes advantage of the freedoms nor even values them, we all get lightbulbs, the internet, cars, looms, fire and the wheel. A lack of freedom means a lack of progress.

Anyway I won't have explained it as eloquently as Hayek, but its a brilliant book and worth looking at.

Cash_is_Trash's picture

Hayek is the shit!

Eat shit Lord Keynes.

thefatasswilly's picture

"The freedom to think new thoughts, try new things, introduces innovations into society that EVERYONE benefits from . . ."

I actually agree. The problem is, the world is about to united / divided into an orwellian trinity of dictatorship. Freedom is long gone. I barely had a taste of it; my predicament is quite possibly the worst of any generation to have existed, or will exist.

The old fuckers on this website got to grow up and live free. I got cockteased without being able to take advantage of it. Future generations won't even know what freedom is, so they won't understand that they are enslaved.

Thanks for the book recommendation, though. Will definitely check it out.

Insert witty title's picture

Yes I'm 31 and am very very scared of the future. Its going to slip into an orwellian nightmare, or a devastating war. But i'm not that bright so its likely i'm wrong.

You will enjoy the book, its a long term project for me, i read a few sections at a time, then drift on to something else and back again, but its one i always come back to.

best of luck, maybe we'll get lucky

thefatasswilly's picture

It's going to be biochemical / cyberspace / actual space war, then orwellian division of power.

Yes, we might get lucky and live :P

Mad Max's picture

Yep leave anything in the economy, like money supply, to a bunch of crones in a central planning committee (instead of a free competitive market) and you're 100% guaranteed the outcome... a complete fuk up

And thus we have the complete "fuk" up that is the current US economy.  A product of a byzantine and corrupt central planning process.

New_Meat's picture

0 Govt- you said 'Crones' and through thousands of translations that has become "Cronies".


- Ned

Zero Govt's picture


the free market doesn't need anything, it is a self-regulating mechanism, no Govt or committee required

if you want to see what central committees and Govt does to markets I suggest you look at US banking, healthcare, property and education, all total fuk ups and all utterly bankrupt

this brings you fully up to date with the bleeding obvious

weinerdog43's picture

"the free market doesn't need anything,..."

Wrong.  Just like sports, there needs to be an umpire to ensure the rules are enforced.  Without rules, it's Calvinball.

Zero Govt's picture

Wrong. The free market has 2 referees already in place, the consumer and the seller. Via 2 mechanisms, the competition mechanism and the pricing mechanism, consumer 'referees' the supplier and vice versa.

Namely if Wal-Marts offerings this week are too expensive you can choose (power) Cost Co.

There is no 3rd referee needed, such as a bunch of arseholes in a committee trying to put a spanner in the workings of the market (see US Govt subsidies of healthcare, education and the biggest disaster of the US Govts making, US property).

The free market is 100% self regulating, a constant liquid state of churn, flux, innovation and improvement 

Cash_is_Trash's picture

Just like sports, there needs to be an umpire to ensure the rules are enforced.

The justice system could function on a profit-loss equation as with a buyer and seller. I wish to agree with Zero Govt by saying that no government is better than a little government.

Are we entering the discussion of anarcho-capitalism? If so, MURRAY ROTHBARD trumps all arguments.

Zero Govt's picture

I tend not to follow intellectuals, i find the street and a street markets provide all the ideas, questions and answers required to understand the planets workings. 

Regards Judiciary it, like Govt, is a monopoly power structure, it doesn't work, and is more of the 'baggage' we carry as society for centuries and it too is for the dustbin (i hope!)

Free society and free markets are both self-regulating through natural laws, adding middle-men or police/regulators/judges/law/lawyers/Depts (see all the baggage?) has not changed anything in society for any good

Go to a US town where its Govt has gone bankrupt and has lost its police etc. Does anarchy break out? Nope, we fall back into a natural order as we've been for thousands of years and just get along like a herd of buffalo or flock of birds. We never needed a 3rd party or middle-men (parasites) we call Govt to work our markets or society. We are self-governing and self regulating as any species on the planet does

The idea we need another agent to make us responsible or civil is a liberal nonsense if not a parasitical scare story to herd us. The biggest lie probably ever told

thefatasswilly's picture

You think in a vacuum. It's as if you don't understand that time is always burning.

Once again, "free market capitalism" inevitably leads to "central planning committee."

Zero Govt's picture

intellectuals and academics think in a vacuum, they detach from 'the street' which is why their thinking goes up their rectum. All that exists is the individual and how we interact with the herd, it is the herd that keeps us in check through natural (animal) rules. Govt has changed precisely nothing about this natural order. 

All authority structures are failures, they usually apply rules nobody wishes to obey and worse authority serves itself (see law, an industry built on serving its own financial interests rather than its supposed role, dispensing 'justice' whatever that is)

If you think free markets lead to central planning first see where central planning got you (bankruptcy of China, USSR, North Korea etc).

Free markets revolve by themselves, companies appear, mature and die like any other life form. Markets are self perpetuating through the constant churn of new enterprise changing the rules and pushing aside the old established businesses. It's a natural lifecycle like a forest.

Ask central planners like Stalin, they could not work out who was 'orchestrating' capitalism in the West that was leading to its success. It probably never occured to a central planner to ask why they were so crap too! It's because of the competition mechanism, it weeds out the shit but being a central monopoly committee you never come against higher IQ's that put you to the sword as happens in the free market.

Central committees get progressively dumber without any competition to keep them sharp/honest. Ask Ben Barnanke, he can't even define inflation poor sod and few of the Fed Chairman know what they're talking about (ditto all Govt Depts)

Central planning (Govt) the biggest failure mechanism ever devised, the dumbest institution in any country.

Competition, you simply can't beat it (as Russia, China, Cuba and North Korea found out)

thefatasswilly's picture

. . . are you a fucking idiot? Reply to what I said and don't just spew preplanned bullshit.

For an example of my argument, look at the United States of America. Argue against that, please. I never said that central planning is better or worse than free market, dimwit.

Zero Govt's picture

are you retarded, I've already mentioned the US and central planning, here's a recap; your property sector is in fuking chaos because of Washingtons quangos (Fanny and Freddie); your education system is in chaos with students in $1 Trillion of debt; your over-regulated banking is totally bankrupt; wherever Washington subsidies your farmers they cause food inflation and food riots; your money supply is a criminal ponzi scheme of debt-based money; your military-industrial complex is the most expensive on the planet but keeps getting its arse whipped by small amateur under-funded forces (Viet Kong, Iraqi militia, Taliban); and to top it all the central planners, central committees and central Depts of Washington are way too thick to work out they're totally bankrupt and have spent America into hell.

What do you like about Govt??? It's the dumbest most corrupt institution in every country! The only thing that works in any country free enterprise (food, clothing, technology, illegal drugs, anything black market etc). Anything Govt touches (or subsidises) turns to crap  

Jean Valjean's picture

You are partly right but you are not mentioning the "key".  That is "free market money".  Unless we are allowed/demand to choose our currency, rather than have a currency forced upon us, the rest of the free market won't work in the long run.

Zero Govt's picture

Yes i agree with a free competitive market in money, competition is the ONLY way to deliver any product or service of worth and the only mechanism that forces failure of the old way and brings in better ways.

Monopoly money (central banking) systems follow the path of all monopolies, they deliver crap and trash the system (see 95% destruction in the value of both Sterling and the US Dollar over past 80 years, the ECB's Euro will only last 15 years tops!)   

Translational Lift's picture

You forgot a few along with their hundreds of sub-agencies (Depts.) most of which could/should be eliminated thus saving $Trillions.

Trade Adjustment Assistance for Firms
Federal program providing financial assistance to manufacturers affected by import competition.

snowball777's picture

Ah yes, the never-ending bleating of the excluded middle.

Who will enforce your contracts?

How will you keep what's yours...yours?

Why does the military use 'central planning', if it's sooo useless?


Zero Govt's picture

Buyers ands sellers in the main do not require contracts, a handshake is usually enough and its built on relationships, not pieces of paper and lawyers in my experience.

Regards keeping what's mine mine same as it ever was, tending to it. The worst we face in society is the odd petty theft or robbery. So what? Beats the 30-60% of robbery of our income by the parasitical criminals of the State.

Finally regards the military being centrally planned it's the sam result as any other: crap. The most effective fighting forces are small and flexible (see SAS). Send 6 SAS into a jungle and you throw 120 of your regular army boys in and I'll bet you it ain't the army platoon coming out alive!

Take Vietnam, Iraq, Afghanistan I (Russian invasion) and Afghanistan II (US-UK invasion). All are mighty military centralised forces against smaller flexible force. The mighty force 'wins' for 1 month then loses the occupation (over time). The Taliban are poor (out-spent $1m to $1), out-gunned and out-numbered. But they beat the back Russians and they'll beat our dumb forces back too as soon as we run out of pissing our money away over there due to bankruptcy here.  

War is like the free market. You can dominate with a big force but over time smaller forces tear you to shreds attacking from numerous angles of weakness. You can stand on an anthill and 'dominate' it for about 1 minute, but after 3 minutes you're being nipped to pieces and have to fuk off.

Small, smart and flexible (like the internet) always beats big central and dumb (like mainframes) over any length of time. 1 big central brain is always dumber than 100 smaller brains, that's why the big dumb US Govt will attack the internet and over time get taken apart and fail completely.

See also the US Govts complete slaughter against the small flexible (illegal) drugs industry. The US Govt hasn't even made a dent in the free market trade in illegal drugs. They have lost the battle day in day out for decades. They're so big and dumb they can't even find the battlefield!!!

Atomizer's picture

It's not easy to build new infrastructure in Africa.

Cash_is_Trash's picture

Fuck Africa.

Can you think of any continent on earth that receives more foreign aid?

How about they legalize capitalism and get their asses to work.

How about we legalize capitalism in America and let the to-big-to-fails go bankrupt and complete the creative destruction process with renewal?


umop episdn's picture

by 1022, confidence had eroded in both the notes and the supporting iron money

Not only did the Chinese learn about the folly of paper money a thousand years ago, they also learned of the folly of iron money. A strong enough magnet on store premises kept the customers from ever leaving the shop with their money.

Cash_is_Trash's picture

Perhaps neodymium was in use back then.

Then again, they currently mine upwards of 90% of rare earths.

Ecoman11's picture

Don't forget Silver! Keep on eye on this new Tweeter that reports daily silver sell outs on the web.!/Silver_Watchdog

It seems like inventories of brand name 100oz bars are being depleted daily.

traderjoe's picture

I just checked Apmex - they only have 165 - 100 oz bars left in stock. A couple of weeks ago I think the number was closer to 1000. And while they have recently been listing some bars as in stock with deferred delivery dates, all of these brand names are now "out of stock". 

old naughty's picture

The Universal wisdom says the [Renewal] chaos starts from an old kingdom. So the rioting Egypt is perhaps only an overture? The impolsion will begin from where it all started?

eigenvalue's picture

Forget about gold and silver. Go long wheat, corn and soya bean and screw the Chinese!

DoChenRollingBearing's picture

Go all of the above.

DBA and JJG are food ETFs, "paper food".

New_Meat's picture

but you can't eat "paper food."

dang, couldn't resist ;-)

- Ned

JonNadler's picture



you beat me to it

DoChenRollingBearing's picture

POW!  Got me guys!

Floom (falls to floor)!

Out by TKO!

topcallingtroll's picture

I just dumped 200 lbs of corn in the woods behind my house. My small part in this war on the chinese peg.

New World Chaos's picture

That's a little less food to help your neighbors when TSHTF, and a little less food for people in Africa who had nothing to do with this.  Besides, the Chinese peg isn't really the problem- the global Power Elite are the problem, and starving the poor is bonus points for them.  If you really want to cause trouble, buy silver.