There is one area where we can be quite certain – Modern Monetary Theory is not that modern. It has roots in the Song Dynasty (960-1276), when the government took advantage of the Chinese technological advance in block printing to create “flying money,” or notes representing metallic coin reserves in the government’s treasury. Moving these slips of paper from one province to the other rather than metallic coins was more convenient. All went well until the government recognized the opportunity to print more paper money than was backed by the coins. Thus was born the concept of fractional reserve banking, which is a major factor in most inflations today.
An economy can survive mild inflation, although it always represents some redistribution of wealth through government. The challenge is in knowing when to shut it down before it reaches the calamitous stage, hyperinflation. The Chinese of the Eleventh and Twelfth Centuries were not able to do that, unsuccessfully defending themselves from the numerically and technologically inferior Jurchen and then Mongols as a result of the internal chaos that had been caused by hyperinflation. …
That lapse opened the door for a charismatic Scot, John Law, to convince the post-Louis XIV regency that it was possible to pay off the previous monarch’s immense indebtedness for wars and luxuries by printing money. Thus Law introduced paper money inflation to Europe. According to Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds, it worked spectacularly initially, but then created a crash of the economy in what has become known as the Mississippi Scheme.
Andrew Dickson White observed in Fiat Money Inflation in France that a mere 69 years later “the French nation found itself in deep financial embarrassment: there was a heavy debt and serious deficit.”
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