Summer School 1: An Economic History of the World

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0:52It is finally summer. A time to relax, touch some grass, and think about nothing but the sun on your face, the breeze in your hair, and the entire economic history of the world. Welcome back, everyone, to Planet Money Summer School. Whenever the temperature rises and nature beckons, we show up with a new batch of stimulating lessons to make sure your brain has something to do on the long drive to the beach. Every Wednesday till Labor Day, we will tackle the biggest questions in economics. In summers past, we've covered econ 101, investing skills and business strategy. This summer, we'll look back, way back, at how we got to the bewildering economy we have today.

1:40Consider it the world's easiest master's degree in economic history. I'm your host, Robert Smith. Now, I know, you might be thinking, Robert, the past is dead and gone. No grown-up needs to know about the Whiskey Rebellion of 1794 or the Smoot-Hawley Tariff. True, you do not have to know this stuff. You want to know this stuff. Because everything we take for granted in the economy today had a start somewhere. When you hear about banks collapsing or inflation surging, strange new forms of money and tariffs, you can be the one to say, I know why this is happening. We have been here before. Now, if you talk to historians, they will tell you, you have to be careful.

2:27The past never exactly repeats itself. You cannot step in the same time twice. That's Rebecca Spang, a professor at Indiana University Bloomington, and she'll be our guide for this first episode. The mistake that is often made in history is that people look to a past example and think they know, ah, this is what I should do now in the present. So if history isn't a roadmap, why study it? History shows us examples over and over again of when things changed. Things changed because people took certain actions. And if you remember that nothing that's happened in history is actually inevitable. It's not set in stone.

3:12It's the product of actions that people make at particular times in particular situations. I think that helps us to feel that we have a little bit of power to affect the world that we live in today. Empowerment. We will take it. On this season of Summer School, we'll bring you some classic yarns from economic history. You'll meet the rogues and murderers who created modern finance. We'll watch as the workers try to start a revolution against the machines. We'll travel with the Vikings and fight mythical creatures for rare and valuable cinnamon. On today's show, we will jump right in with a surprisingly hard question.

3:48What is money? Money is mysterious. Money works best, I think, if we don't actually think about why it's working. If we pay too much attention to the things we do with money, I mean, how bizarre is it that I can go into a store and I can take all this food and I just give somebody a piece of plastic and they say, OK, fine. Then I walk away with all the food. I mean, it's really amazing. But if I stopped and thought about it, if we all sort of stopped and thought about, hold on, what are we doing here? The whole thing would just kind of come crashing down around our heads. All right, well, let's put on our hard hats then, because we have two history stories today that will definitely make you think too hard about money.

4:36And we'll have our professor along to offer lessons for today. Let's start with a giant stone coin, lost but not forgotten, at the bottom of the ocean. After the break.

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5:33Same goes for where you invest. Level up and invest smarter with Schwab. Get market insights, education, and human help when you need it. Welcome back class to Planet Money Summer School. In every lesson, we'll provide a few historical flashbacks and then bring our professor back to draw out the economic lesson inside. We're going to start with the most basic question you can have in economic history. Who invented money? Our professor, Rebecca Spang, says the answer is not so simple. Because money is many different things. It doesn't have a single invention. It happens lots of different times, lots of different places.

6:09For lots of different reasons. Around 5 ,000 years ago in ancient Mesopotamia, money was written into clay tablets to keep track of debts and promises. And paper money shows up in China in the 11th century. Sometimes money seems to arise naturally. Humans have something shiny that they value and becomes a tradable form of wealth. Other times it takes a king or ruler to create a form of money that can be used as a sort of tool. Today in summer school, we'll have both kinds of origin stories. Let's start with the shiny stuff. And I don't mean gold or silver. I mean shiny stones. Very, very large shiny stones on a tropical island in the Pacific, the island of Yap.

6:55Now, we don't have records of how long the people of Yap used stone money, but when explorers encountered the island hundreds of years ago, they found that value was stored as giant stone disks with holes in the center. Let's play some of the episode we did about Yap in 2010 with hosts David Kestenbaum and Jacob Goldstein. They were talking with Scott Fitzpatrick, an anthropologist now at the University of Oregon. Scott says the stones probably began with a navigator from Yap who canoed to another island and found something really, really nice. Well, oral traditions talk about a Yappies navigator named Nagumang who traveled from Yap to Palau.

7:36And Palau is about 250 miles south, southwest of Yap. And they talk about this navigator going and finding this milky white crystalline stone, which is limestone. And Palau has an abundance of that. So Nagamang finds this strange, beautiful thing. And it's not like his first thought is, hey, I'm going to invent money. He's just thinking, you know, I'm going to carve some beautiful fish out of this stone. But remember, all he's got is this little canoe. and according to the story, he looks up at the moon one night and he thinks to himself, you know, a big piece of stone in the shape of the moon, that would be a lot easier to bring back to Yap than a great big stone fish.

8:15So he carves this big round disc out of stone and then he puts a hole in the middle of it, probably so he can stick like a branch through it and maybe roll it back to his boat. So he brings the stone back to Yap and the people go crazy. They love it. Pretty soon anybody who is anybody wants one of these stones. And, you know, money often starts out this way, like gold coins. Before we had gold coins, you know, gold was just something that rich people and kings kept around. And they made like, I don't know, what did they make? A crown, maybe? Yeah, it's a king, right? You know, but before it was money, it was just something that people liked.

8:49And that says you're rich, right? Like, hey, I'm the king. I got gold. So anyway, the people of Yap, they start sending lots of expeditions over to this other island. People are going out in these little boats and bringing back these huge stones. Some of the evidence that we've looked at and trying to estimate how big of a stone could a bamboo raft actually move, we're probably talking about not in excess of two meters. How heavy would that have been? Well, it's on the range of four to five metric tons. So that's about the size of two small cars. It's pretty big. So, David, let's pause to reflect here.

9:25You have this pre-industrial society. You have these guys carving these giant stone disks that are taller than a man, putting them on these tiny little rafts and taking them hundreds of miles across the open ocean. But they do this. They do it over and over again because, you know, the stones are really pretty. They don't have gold or silver on the island, but they do have these nice shiny stones. If you scrub them, they're really beautiful. Just kind of this milky, crystalline white. They're almost blind to you. They're so bright. So at some point, we don't know when, the people on Yap realize what almost all societies realize.

9:59They need something to store value. They need something that everyone in society agrees you can use to pay for stuff. And like many societies, the people of Yap, they took the thing they had that was pretty and hard to get, the thing that was their version of gold, and they decided these giant stone disks were going to be money, even though they were giant and stone. So a piece of stone money, it was really valuable. It wasn't like you would roll one of the big ones down to the corner store and buy some fish. I mean, it seems like for day-to-day stuff, they would maybe use shells. But for big stuff, special occasions, you would use stone money.

10:37I mean, you can think of it like a$10 ,000 bill. In oral traditions, they talk about, for example, a couple getting married and their family members or friends might give them a certain number of pieces of stone money. If somebody was in real dire straits and they were, you know, something happened to their crop of food or they were running low on provisions and they had some stone money, they might trade those for food or for help. So let's get back to this question of what is money and see how the stone money holds up. Now, economists actually have a three-part definition they use for money.

11:16Part one is money should be a store of value. So you couldn't, for example, use coconuts because coconuts will rot. So stone money definitely meets that one. We can check that one. The second is usually it has to be a unit of account. And here things get a little slippery for classifying these stones as money. Unit of account means there's broad agreement that there's a specific value attached to it. And it wasn't like people priced things in stones like, hey, you want to buy that canoe? That's three stones. On the other hand, some stones were clearly worth more than others. There are bigger ones or some famous guy went and got it.

11:49It might be worth more. So I think you can give stone money sort of a half check mark on unit of account. All right. So we got one and a half check so far. The third item on the list is money should be what economists call a medium of exchange, which basically means something you can use to buy stuff. One economist who was writing about the stone money said you need something to be storable, recognizable, divisible, and portable. So for storable and recognizable, yeah, giant stone disks are storable and recognizable as hell, right? A divisible, that one, it actually doesn't work. You cannot, in fact, break a giant stone disk in half and have like half as much money.

12:26That doesn't work. And then we get to portable. So, I mean, remember, one of these things can weigh as much as two small cars or something, right? And this is where something really profound happens. The people of Yap decide that if you give somebody a piece of stone money, you don't actually have to give it to them. Here's Scott Fitzpatrick. They often talk about the stone themselves not changing hands at all. In fact, most of the time they won just the sheer amount of labor it would take to do it. You know, it's so funny because on the one hand, like these are very concrete forms of sort of money, you know.

13:02But it also very quickly becomes abstract just because of their size. So they don't actually move it in financial transactions. They just say, OK, it's yours now, even though it's outside my house. Right, right. And the really interesting thing about this whole process, I think, too, is that everybody knows whose it is. So, OK, so you can imagine, you know, everybody sees the stone and knows somebody owns it. You know, I know Kestenbaum's stone is the one over there by that tree. But as it turns out, you don't even have to see a stone for it to have value. There's this story that one time a crew of workers was bringing back this great big piece of stone money back to Yap on a little boat.

13:42And just before they got back to Yap, they ran into this big storm and the stone ended up on the bottom of the ocean. But the people, they get back to Yap and they tell the story and everybody says, no problem. That stone money, it's still good, even though it's sitting on the bottom of the ocean. So somebody owns this piece of stone money, even though nobody's ever seen, you know, nobody's seen it for over 100 years or more. Does that seem kind of amazing to you, though? Yeah, yeah. I was a huge one. It was giant and more beautiful than anything. But unfortunately, I don't have it here. Man, that is the definition of abstract money.

14:14Yeah, it really is, isn't it? So, Jacob, when we're reading these stories, you know, they seem kind of funny. And then at some point you realize, oh, you know, I use stone money all the time. I mean, if I write you a check, right, what actually changes in the world? In the physical world, essentially nothing, right? Like the numbers in your bank account change a little and the numbers in my bank account change a little. But it's essentially like there is some stone on the bottom of the ocean that you used to own. And now that stone belongs to me. Even though we have this much more advanced financial system, money, it's basically faith in something that you can't see.

14:50There's mutual agreement that there's something out there in the world that has a certain value. It's like trust plus invisibility. Equals money. That was David Kestenbaum and Jacob Goldstein from an episode we did in 2010. Joining us again is our professor today, Rebecca Speng. Hello, I'm glad to be here. So Rebecca, what is the modern day equivalent of these giant stone coins on YAP? Do we have things like it today? In many ways, we don't. So what you need to think about is the giant stone coins are not part of what we think of as the market economy. They're used in the prestige sphere for really important events like weddings or to cement a political alliance.

15:40So they're things that you would never, ever consider using as ordinary money. In the same way that we today, some of us, may have things that we value, but that we would actually feel really bad about cashing in. So imagine if you have jewelry that you inherited from your great-grandmother. You want to hold on to it instead of putting it into circulation. Economists love the story of Yap because it shows how money might arise naturally when a society needs it, you know, when you need to store value or make transactions easier. But as a historian, I know that you focus on something else that gives rise to money, which is power, governments, kings.

16:30Why do they need money to exist and how do they make it happen? So the state, a government, an administration, uses money as a way of bringing people and communities into their orbit. So once you know that you use little shiny coins with owls on them, then you feel like you're part of the owl community, right? You are part of that sort of system of belief. So it's actually one of the ways that communities recognize themselves. There's another reason why governments need to have something like money, because governments in many parts of the world at many times have armies, and armies are expensive.

17:22If you can pay your army in little shiny things, and then if your army can force other people to accept the little shiny things in exchange for food, then you can keep your army fed. And as your army keeps advancing, the territory where your little shiny things circulate and are accepted gets wider and wider. And over time, new forms of money keep popping up. After the break, we'll take money to the next level and hear what happens when one man, a rogue and a murderer to be exact, tries to create a whole new financial system from scratch.

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18:53Long-term projects need long-duration capital. That's where Apollo steps in. With scale, flexibility, and a focus on growth, they're partnering with companies to drive the future, one innovation at a time. Learn more at thinkitnew.com slash renaissance. We're going to set the summer school time machine to the 1700s now, and across the globe from the Pacific Ocean to Europe. It's the story of a giant leap forward in modern finance. followed closely by finance collapsing and blowing up the entire world. You know how that works. It's a cautionary tale for any economy that moves beyond stone coins.

19:32It starts with a Scotsman named John Law. L-A-W. John Law. He's in his early 20s, well off, and living the high life in London. He's gambling, affairs with women. We don't know the exact reasons, but John Law kills a man in a duel. A sword-fighting duel. He's convicted, sent to prison. Then he escapes and heads to continental Europe. That's the personal drama. But now the economic drama begins. Jacob Goldstein and Mary Childs pick up the story around 1714. So John Law is on the lam. He's popping up in one city after another across Europe, Amsterdam, Venice, Paris. And he's always at the gambling tables playing cards.

20:13And he's always winning. People are starting to notice this gambler who's getting rich. When he arrives in Paris, the chief of police sends this warning letter to the foreign minister. He writes, quote,

20:37But Law caught a break. The minister wrote in the margin of that letter, he is not suspect he may remain in peace. So John Law is living in Paris, gambling, making money. But he's also got this, I don't know, a hobby, a little side hustle he's been trying to get going. He's trying to convince France, the whole country of France, to completely change the way it is running its economy. So France has been fighting war after war, spending all this money, and now the country is basically broke. Farmers can't borrow money to plant seeds. At one point, the king had to melt down his silver and gold plates to pay his soldiers, which was kind of emblematic of the whole bigger problem.

21:17The whole economy ran on gold and silver, and there wasn't enough gold and silver to go around. John Law knew something about this problem in particular. His father was a goldsmith, and during John Law's lifetime, goldsmiths in Britain were kind of becoming banks. What happened was goldsmiths had safes in their shops, so people started storing the gold with the goldsmiths. Goldsmiths started giving people receipts for the gold, and after a while, people started to use the receipts themselves to buy stuff or to settle debts. The receipts were like proto-paper money. They were money adjacent. This wasn't the first time people in the world had used paper money.

21:53China had actually used it hundreds of years earlier. But it's a new thing in Western Europe. Then the goldsmiths went further. They started making loans. Goldsmiths would give you a claim check for gold that you could go out and use as money. But you didn't have to deposit any gold. Your claim check is for gold that kind of doesn't exist. The goldsmith is creating money out of thin air. So if everybody with a claim check came back to the goldsmith and asked for their gold back, the goldsmith would not have enough. To be clear, this is basically how banks work today. We call it fractional reserve banking.

22:26And similarly today, if everybody with a bank deposit came and asked for their money at the same time, we call that a bank run. The bank doesn't have the money. That is just how banks work. But on the flip side, if your economy, say, runs on silver and gold and you are so low on silver and gold that you just melted down your very favorite chalice, fractional reserve banking is exactly what you need. So John Law is ready to pitch this idea in France. Normally, the kind of guy he is, he would just go straight to the top, pitch it to the king. But the king of France at this moment, Louis XV, five years old.

22:58Not super into finance or banking. And France at this time is being run by a regent, a duke, the Duke of Orleans or Lyon. Or Lyon. OK. So the duke's hobbies include working in his home chemistry lab, composing operas and staying up all night with nobles and opera singers and actresses who would all get drunk, sleep with each other and say, quote, vile things at the tops of their voices. So I bet you know who the duke is going to love. John Law. We talked about this with Anne Murphy. She is a historian, but she also used to work as a derivatives trader. So she knows a few things about finance bros like John Law.

23:38He's out there networking, getting to know the right people. And he manages to convince them to allow him to set up a private bank. A bank owned and run by John Law. And France doesn't really have banks as we know them at this point, right? It's not a thing in France, banking, like we have banks. Not really, no. There's a bit of a suspicion about what banks are and what they can do. I mean, there's a suspicion of banks here and now, but they exist, nevertheless. Yes, and every country, I think, has to figure out how to make its peace with what banks are and what they do. So this is step one of John Law's scheme.

24:21In 1716, he sets up the first real bank in France. He's jumped from card game banker to actual real banker. It's called the Banque Générale, which is a fancy name, but it's run out of his house. He prints paper money backed by gold and silver, but everybody thinks his bank is kind of a joke. The next year, though, John Law got another break. His drinking buddy, the Duke, made a new rule that said everybody in Paris has to use the bank's paper banknotes to pay their taxes. And, you know, a reasonable definition of money is it's the thing you pay your taxes with. Because once the government says you have to use this thing to pay your taxes, whether that thing is silver coins or cloth or dollars or paper money from the Banque General, then everybody knows that at some point they're going to need to have that thing to pay their taxes.

25:13When the Duke forced people to use John Law's paper money to pay their taxes, his paper bills became real money. So France's economy is now running on the full faith and credit of John Law. So let's pause here for just a moment and go to Law's biographer, Antoine Murphy, for the recap. He killed a man in a duel. He was sentenced to death and then he escaped from prison. So you wouldn't have expected a great monetary economist to develop from such a figure. Depends on your views of monetary economists. It sure does. It sure does. Yeah. Antoine Murphy says John Law really believed that if you build an economy right, everybody can get richer, including but not limited to John Law.