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Last Updated: Aug 15th, 2008 - 11:26:43

Newsletters : 2007 Newsletters : 27 July 2007
Thought for the Day

When I see that the government has increased the money supply by 16.5% over 2006 and I then see that they calculate that our GDP has increased by 2% (or maybe less) I have to ask myself, "Is that a real increase?"

Have we really experienced economic growth? I get a feeling that it is like reducing the measuring power of the metre rule by 16.5% and then measuring the distance from Wellington to Auckland and finding that we have magically produced a whole lot more state highway. "Hasn't Transit done well?"

All is not well in our measuring department.


Jul 26, 2007, 11:04

 Newsletters : 2007 Newsletters : 27 July 2007
Former Malaysian Leader Renews Call For Gold Dinar

Former prime minister Tun Dr Mahathir Mohamad has called on the Islamic world to embrace the use of the gold dinar for international trade and as an alternative to US dollar reserves in central banks.

As you will know by now the use of fiat currencies means that governments will "print" too much money and lead to an inflationary spiral. The banks will be keen to lend out this money and will take on more and more risk in an effort to maximise their profits. And so on and so forth down the money chain with increasing debts and greater risks all round. The ultimate result at some stage is an economic downturn as the debt money goes back to the nothing it was generated from.

The only answer is to use currency backed by gold. Unfortunately it is not in the interests of politicians, Central Bankers or the wide range of money men to give up the power to make money that this fiat currency gives them. It is therefore unlikely that any western country will start advocating the use of gold backed currency.

However, Asians and Muslims may see it differently. As the US dollar continues to lose value the oil producing nations see their valuable oil being turned into paper money of dubious quality. Some are turning away from the dollar.

It will be interesting to see if this concern turns into a flood away from fiat currencies and back into gold. Perhaps Tun Dr Mahathir Mohamad is leading the way?


Jul 26, 2007, 10:49

 Newsletters : 2007 Newsletters : 27 July 2007
Make Way for China Gold Buying Frenzy

Paper Money

The Chinese were using paper money way before there were humans in New Zealand. Here is a little history about the early days which may give us clues about Chinese beliefs in money.

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Paper currency was a by-product of Chinese block-printing. It started in Tang but not until Song dynasty that it became institutionized as a governmental policy. It had two main advantages over money made out of silver, gold, copper or iron: It was easier to carry around and the copper and iron could be saved for use in everyday objects. Names and seals were printed and written on paper money by the government officials who issued it. Unfortunatey no written documents exist today which enable us to know how this system of paper currency actually functioned prior to the Yuan period. When Maro Polo traveled to China in the 13th century, he was so impressed by paper money that he described how it was made, used and valued. Paper money was not used in Europe until the 17th century.

Paper money began with the "flying cash" of the Tang (618-907) dynasty around 800. The Tang government considering the inconvenience of shipping cash to distant areas where government purchases were made, paid local merchants with money certificates called "flying cash", because of its tendency to blow away. These certificates bearing different amounts of money could be converted into hard cash on demand at the capital. Since they were transferable, they were exchanged among merchants almost like currency.

"Flying cash" was not meant to be currency and its circulation was rather limited. Real paper currency was not introduced until early in the Song (960-1279) dynasty, when it was utilitzed by a group of rich merchants and financiers in Szechuan, the same province where the art of printing had been invented. Each banknote they issued had printed on it pictures of houses, trees, and people. Red and black inks were intermittently applied; the seals of the issuing banks were affixed; and confidential marks were made on each bill. All these devices made counterfeiting extremely difficult. These banknotes could be converted into hard cash at any time in any of the issuing banks. Widely circulated, they were readily accepted for the payment in debt and other financial obligations. In 1023 these banknotes were withdrawn and only official notes printed by the government were allowed. This new adopted governmental policy was successful at first for two reaons: First, for each issue of paper notes to be put into circulation, the government provided a cash backing. Second, paper notes and standard coins were interchangable. Moreover, a citizen could buy salt or liquor with his paper notes from the government-owned stores. In short, paper notes were as good as coined money.

After Chin (1115-1234) occupied the north China, it followed Song's practice. In 1154 it established a Bureau of Paper Currency in Kaifeng as the central agency in charge of all issues. Two kinds paper currency were issued, one of large denominations, consisting of one to ten strings (each string was worth 1000 standard coins) and another of small denominations, bearing the amounts of one to seven hundred standard coins. The validity of each issue was limited to seven years. However little thought was given to backing the currency issue and inflation soared during the 12th century. The counterfeiting of paper currency was punishable by death and there were few attempts. In 1183, a printer, who had produced 2600 fake notes in 6 months was arrested and sentenced to death.

Soon after the Mongol took over China and established the Yuan (1264-1368) dynasty, it followed the example of its predecessors, Tang, Song and Chin, in using paper currency. The first paper currency issued in Yuan dynasty was in 1260. Various denominations were printed, ranging from a face value of two standard coins to the highest denomination of two strings. Excessive printing year after year soon flooded the market with depreciated paper money until the face value of each certificate bore no relation whatsoever to its counterpart in silver. In 1272 a series of new issues was put in circulation and the old issues were converted into the new ones at the ratio of five to one. The new issues were printed with copper plates instead of wood blocks, as had been the case before. In 1309 another conversion became necessary. In fifty years from 1260 to 1309 Yuan's paper money was depreciated by 1000 percent. To make the situation worse, the government often refused to exchange for new issues old certificates that had been worn out through a long period of circulation.

Paper money went westward when the Mongols printed Chinese-style notes in Iran in 1291 and led to the usual inflation. The earlist European paper money was printed in Sweden in 1601. It is possible that Europeans learned the art of printing and paper currency through the examination of Chinese paper money which were either obtained in Western asia during the Yuan dynasty or had been brought back from China by travelling Europeans.

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Now, what will happen when the Chinese are encouraged to engage in a retail gold exchange?


Jul 24, 2007, 15:55

 Newsletters : 2007 Newsletters : 27 July 2007
'Dutch disease' Could Shake The Pound .

Politicians the world over have discovered the benefits (to them) of printing money. Unfortunately this habit has its downside (for us).

This article is from the British perspective but also has interesting implications for New Zealand.


Jul 21, 2007, 12:54

Can we fix it?