Following the example of the more advanced people they had conquered, the Tartars began issuing their own paper currency, and after 1260, when Kublai Khan completed his conquest of China, he made it the regular institution reported by Marco Polo. In Marco Polo’s day the notes were still passing at full face value, but in the last years of the Mongols’ Yüan dynasty (1260–1368), floods of paper money once again signaled inflation. When the first emperor of the new Ming dynasty (1368–1644) took over, he cut back the paper money in circulation, and finally succeeded in stabilizing the currency.We like to flatter ourselves that we know so much more than our predecessors. And yet, the idea that printing more money will lead to economic growth as well as reductions in poverty and income inequality can be seen in almost every Paul Krugman column that mentions the money supply. The problem isn't that his solutions are old, failed policies from the 1930s, but that they are old, failed policies from the 13th century.
From its beginnings in China, printing bore this guilty association with unsound currency. For centuries printed paper money appeared to be the only form of printing known to European travelers. A paper-money debacle closer to the West added to the ill-repute of printing. In Tabriz, capital of Mongol-conquered Persia, both Venice and Genoa kept commercial agents during the early years of the fourteenth century. The extravagance of the Mongol ruler Gaikhatu Khan from 1291 to 1295 put pressure on his treasury, which he tried to relieve by issuing paper currency. Block-printed in 1294 in Chinese and Arabic, each of his notes bore the date of the Muslim era, a warning to forgers, and the cheerful prediction that now “poverty will vanish, provisions become cheap, and rich and poor be equal.” But the magic did not work. After only a few days of compulsory use of the paper, commerce was disrupted, markets closed, and the Khan’s financial officer was reported murdered.
The only difference between the treasury of Gaikhatu Khan and the Federal Reserve is that the latter has had the sense to slowly increase the money supply, thus delaying its eventual day of reckoning. But the cold, hard, mathematics means that day will eventually come.