This is an essay on money. I am going to talk about money indirectly, by looking at a previous collision between economic systems, specifically the collision between Europe and China between roughly 1500 and 1900, and how different goods led to different strategies – porcelain, silk and tea were all Chinese goods in 1500, and would be the basis for export, while the Chinese were largely only interested in silver from the outside. This is a situation which is fundamental to political economy – in every chain of trading commodiites

China

If you had alighted on the planet from someplace else, let us say, Neptune, and dispassionately observed the comings and goings of a certain species of bipeds, you would have been able to pick out their unusual ability to organize in very large troops that spanned space and time. If you were of a technological bent, you would have looked at the Chinese troop, and admired their technological prowess, and perhaps picked this troop as the one which was most likely to dominate the planet. The European troop, sickly, short, prone to excess, would have been distant behind others in any ranking. Unfavorable location and cultural chaos, as well as a large dollop of anti-empiricism and predeliction for multigenerational warfare would seem to preclude them from doing much more than holding off the expanding and aggressive Turkish empire, which seemed destined to do for Islamic culture what Alexander the Great had done for classical Greece – create a continental empire and seed it with a militarized version of an intellectually and artistically advanced society.

The Chinese had gunpowder, banking, moveable type, had experimented with paper money, had mathematical engineering, and advantages in production, including what we would now call a factory system.

What a difference two Neptunian years would make in this judgment, by 1700, the two societies were far closer to equal, with the Chinese leading in some areas, but falling behind in others. It was still, however, the clear leader in consumer goods. Life was better in the Forbidden City.

The history of porcelain provides an example of the arc, somewhere in the Tang dynasty the process of transforming stoneware – that is pottery – to porcelain began, with different combinations of materials and higher and higher temperatures. Higher temperatures fuse the glaze that decorates the piece with the paste, which forms the body. Porcelain manufacture reached new heights during the Mign period, with its characteristic blue and white underglaze pattern which still says "porcelain" to people. The city of Jingdezhen became the center of manufacture and the "porcelain capital" of China during the 1300's.

By this point, Korea and Japan had begun to produce versions of the classic "hard paste" porcelain. Europe, however, could not duplicate it, though in northern Italy a "soft paste" porcelain, which is different chemically, is fired at lower temperatures meaning that it does not fuse glaze and body, and is porous rather than solid – was developed in in the 1570's.

But the key missing pieces were resources – hard paste is kaolin and petuntse. Kaolin is named for the town in the Jiangxi province where it was originally mined, and its close proximity to Jingdezhen is one reason why that city became the porcelain capital. Kaolin is a clay that is a silicate – that alternates layers of eight silicon atoms coordinated by aluminum, with layers of four silicon atoms bonded by a base, or hydroxy, group. It is a white clay. The other ingredient, BaiDunZi as it would now be pinuyinized, is a kind of fledspar, that is a silicate based rock with aluminum, calcium and sodium. It is by powdering the rock and mixing it with the clay that "hard paste" is formed. The European porcelain was a soft paste variety made of clays and glass like substances to mimic the two materials used by the Chinese. Early versions were expensive, deformed, and aesthetically less appealing. It was not until 1710 that Johann Friedrich Böttger was able to take a formula that Ehrenfried Walther von Tschirnhaus had created, and make it mass produceable. He created what was to be called Meissen porcelain, which duplicated hard paste china in quantity. At the time porcelain was so expensive it was called "the white gold", hence the monopoly did not last long, within 10 years the secret had been transported to other places in the German speaking world. But the key was the kaolin, which came from Schneebergan in Saxony.

By the 1730's, Louis XVth backed the French effort to produce high quality porcelain, he became part owner, and then full owner, of the Vincennes factory, which produced a better kind of soft-paste porcelain, but in the French discovered a source for kaolin, near Limoges. While the Vincennes factory, moved to Sèvres, remained the artistic center even to the end of the century, with its royal backing of high design, the hard-paste revolution in European porcelain was begun. Sudden, the aristocracy, which had been rife with "avid collectors" of Asiatic porcelain, were on the trail of the real thing. For the next century, aspiring hard paste makers would move to Limoges, including the founder of Haviland China, for example, to get access to the Kaolin of Limoges. The name came to denote an entire period and type of China.

In Britain, production of all kinds of porcelain lagged, even though the British tea drinking habit made them consumers of "chinaware" from abroad. In the mid 1700's, under pressure for import substitution, soft-paste paste production began, and when a source, still the only source in the British Isles as far as I know, of kaolin was found, hard paste porcelain began. While simple compared with the continental productions for example this 1768 piece, under the mercantilist regime of the time, it was a boon to the silver balance of Great Britain, then under tremendous pressure because of the cost of colonial and continental wars. The initial designs copied the French models in soft-paste, and the Chinese and Japanese designs, but rapidly began to diversify into unique styles which would, themselves, later be copied.

The irony is that the British granted a strong patent as well on the manufacture, even though it had not been invented in Britain, and hard porcelain production did not begin in earnest until 1790. The British eventually began mixing bone ash with hard paste, to produce what is now called "bone china".

This arc shows one response to a luxury import, first substitution with clearly inferior goods as the aristocracy dominates the demand, that is various kinds of slipware, then the creation of a substitute, soft-paste, which can be reproduced with local materials, then the creation of a duplicate, and finally, the introduction of unique types, for example bone china, which have their own advantages.

This arc – of Europe encountering in the 1500's, importing in the 1600's, matching in the 1700's and forging ahead in the 1800's, is seen with a variety of other goods. Porcelain's arc was determined by physical facts – the key materials were not known, and porcelain is hard to import and export, because it is breakable. Thus, until the Europeans had duplicated it, it was a rare commodity. Even after duplicating it, they copied the artistic and design forms of the originals. The Chinese, for their part, learned to create their own versions of European styles for export.

However, Porcelain did not have a very large impact on European trade balances, specifically because it was a luxury item. By the time there was widespread demand for chinaware, with a middle class with enough stability to demand it, the Europeans had substitutes and were closing in on parity with China.

The pressures created on the European economy by the China trade accelerated the drive to a triangular trade, where colonialism was used to secure raw materials and specie, particularly silver, and this was used to trade with China, which the Europeans could neither sell to, nor militarily overcome from 1500-1800. The drain of silver on the European economies was exacerbated by internal wars – because very little money sat as actual savings, governments and entrepreneurs were constantly scrounging for money, which they got by both innovations such as the joint stock company, and by deviations, such as debasing currency and outright plunder.

This brings me back to the meaning of money. In every chain of trade, there are goods that are bought by others, who, in turn, buy goods that interest them. However, at the ends of this chain are producers who sell goods, but desire nothing that the other side produces. They are interested solely in wealth and control itself. These are the producers that define what money is: money is what ultimate producers will take for the goods or services they produce. That good or service is often fiat itself – military stability.

The responses of those buying these goods can be divided into a few basic types. The response of porcelain is one – value, substitute, differentiate, duplicate, extend. The key to this process is the ability to find or reproduce the key resources which give the producer the power in the first place. In the case of porcelain, kaolin and the right kind kind of feldspar, which came to be called "china stone". But it also required duplication of the systems as well. The Chinese had what could be called factories, and a system of interface between production and patronage, the Europeans were only beginning to in the mid 1600's, and it was the impetus of patronage that started both the soft paste French industry, and the entire English industry. In Saxony, the rediscoverer of porcelain would be turned down in getting funding for a factory, it would take years before "the white gold" would enter production in Meissen.

Silver

Silver has been used as a monetary metal since there has been precious metal in use as regularized currency. While the development of currency historically has little meaning with respect to the ultimate place of money in theory, history shows that there are several strategies for creating money. One strategy is to use a general commodity, such as rice or grain, or the production of rice or grain, as the basic unit of account and ultimately demandable commodity, and use gold or silver coins as a means of transporting the ownership. This is more sophisticated than it sounds, because it allows for a giro clearing system, or a decentralized network which forms the beginnings of banking.

Another strategy is the fiat strategy, where the precious metal, as a thing of worth to military nobility and their retainers, to make the precious metal the thing of value itself. These strategies inter-relate, in that grain as a base of value is related to its ability to support the pre-firearms military.

The difference between these two monetary strategies is the difference between a flow and a stock in economics. In the first system, there only needs to be enough silver to evaluate the amount of grain being exchanged, where as in the second circumstance, there needs to be enough silver to represent the amount of wealth stored. The flow model of silver, used by the Japanese among others, allows credit based money systems and for wealth to be held in other forms than specie. The stock system means that silver becomes far more valuable, as there is a reason to hold it in preference to anything else. Flow systems limit the amount of transactions that can be accomplished compared to the total of wealth – that is, only as much of the grain can be traded as there is silver, while the stock limits the amount of total money, but allows all of it to be exchanged at once. Flow money strategies are less liquid, but can have a larger total money supply in the form of credit based notes.

The European system of money in the 1500's was not particularly sophisticated, the cheque had only been developed, there was little competition, and rates of interest were both high and variable. The relationship between specie and credit can be seen in the terms of Fugger family's loans to the Hapsburgs: they were secured by an interest in the silver and copper mined in Tirol. In 1617, Venice, however, takes an important step, it forms a new bank, backed by the government, to bail out the Banco della Piazzza di Rialto, whose loans were unsecured. The new bank issues credit to pay off the original depositors, and to provide a stock of money to clearing transactions.

It would take another century before there was the first formal central bank – the Bank of Sweden – and several more decades before central banks would work in concert.

The underlying pressure is to produce a means to turn specie back into a flow, and have a stock of wealth storage which can be produced as a substitute. The solution, repeatedly tried, was paper money. Paper money was in the form of redeemable certificates – that is, payable to the bearer on demand. This was, in short, a cheque without an author.

The incentive for this was the need to have a form of savings that would turn specie back from a stock into a flow – the only people who would have silver at any given time were those who wanted to engage in a transaction. This would allow more transactions with the same monetary stock. However, issuing more notes than there was coinage to back them proved consistently disastrous, since a run on the bank would lead to a lack of silver, and, often, a death sentence, which, even if commuted to life in prison, for the banker. Even if the banker in question was working hand in glove with governmental authorities.

It was not, as was later observed, a shortage of silver that was the problem – Spain which had silver pouring in from conquests in the New World was in as much monetary difficulty as anyone else. It was the lack of macroëconomic reasoning. If a country had too little silver, people would hoard it, if too much, inflation would produce pressure to spend money rapidly, and consume conspicuously. As the silver rich Hapsburgs bled money into the rest of Europe, it created demand for that which silver could buy. The silver rolled in from the New World, and out again to China.

Compounding this problem was that the early nation-state apparatus was not very good at improving the quality of life for people – other than running a larger military – but it was very good at collecting more taxes.

The Chinese had an almost bottomless appetite for silver, because under the late Mongol dynasty they had gone through a cycle of first paper money inflation, and then debasement of coinage. The Ming dynasty was able to overthrow the previous emperors in no small part because economic turbulence had lead to irrigation projects being abandoned and other crucial infrastructure requirements slowing to a trickle. And China lived and died by its water infrastructure, particularly along the HuangHo – the Yellow River.

China shifted from a coin and paper system – since both copper coins and paper money were in low regard, to basing its exchanges on silver bars, for which it traded, first with Japan, and then with the wider world. The pump of silver from the New World, where it was taken by force, through Europe, to China, added to the instability of an age which was both discovering the power of a larger world, and the problems of control The Europeans were about 200 years behind the Chinese in banking and monetary systems, they had not yet had the experiences with fiat currency and with debasing of coinage that would lead to demands for a more stable monetary regime.

The result is that silver poured into the European world, and then poured back out again, creating localized inflation, and the resulting demand to allow greater circulation of funds. However, since the silver was going out, in many cases faster than it came in, there would inevitably be a point where a bank had issued more notes than it could cover with silver, and create the circumstances that could lead to a "run" on the specie. Over and over again ambitious bankers found out that the could print enough notes, have enough silver and gold, but not both.

One under emphasized reason for this circumstance in both China and Europe was the growth of centralized forms of power, commercial and political, which were far better at squeezing money out of people, than in generating higher living standards. The Chinese government of 1400, and most European governments of 1600, were far better at getting money, than at spending it productively. The growth of bureaucracy, professionalized government service, centralized command and control replacing a feudal system exacerbated the gap between rich and poor.

The strategy of silver – the Chinese importing silver to stabilize their economy and prevent another round of inflation, and the Europeans engaging in far ranging conquest to supply their demand for the goods that only silver bought, would, in turn, lead to other strategies. The Chinese would focus on creating goods for export, while restricting demand from abroad, and the Europeans at finding ways out of the vice like grip on commodities that the Chinese began with.

The underlying dynamic is that the Chinese relied upon internal fiat – control of their land, economy and monetary system – while the outside relied on external fiat, control of nature included. The end result was that a slow cycle ignited – the Chinese, the more they exported, the more they industrialized. The more they industrialized, the greater the monetary supply required, which in turn, created the need to continue exporting to sustain the money supply, as the center of monetary dynamics shifted from the central government to trade, the power of the central government weakened, and with it, the ability to maintain fiat.

The Europeans, with each round of confrontation grew stronger – the same military fiat skills that led to the conquest, in turn, of the Americas and then India, would finally be able to force the Chinese to trade on European terms at gunpoint. But the more far flung their empires became, the greater the demand for luxury goods, and for a monetary system which could support global trade became, which, in turn, pressured the Europeans to have larger empires, greater military power, more technology and more powerful government.

This is important to underline – the Chinese chose a strategy which, while not expansionist, undercut the power of their central government, while the Europeans chose a strategy which strengthened governments and created the opportunities which they would later exploit in the form of the opium trade.

Both strategies, however, shared one important point in common – they are dominated by elites and would be elites, creating greater and greater dislocation of the agrarian work force and feudal nobility. As a result, both created increasing turbulence within the political unit, leading to upheavals, civil war, and alienation.