Journalist Jacob Goldstein traces the advent of paper money back to 1000 AD China. Above, $100 notes are printed at the Bureau of Engraving and Printing in Washington, D.C. Mark Wilson/Getty Images hide caption
Mark Wilson/Getty Images
Journalist Jacob Goldstein traces the advent of paper money back to 1000 AD China. Above, $100 notes are printed at the Bureau of Engraving and Printing in Washington, D.C.
Mark Wilson/Getty Images
The Federal Reserve is currently engaged in a battle to bring down the nation’s inflation rate, which has been rising steadily since 2021. Journalist Jacob Goldstein says the Fed’s ultimate goal is to slow inflation by raising interest rates — while also avoiding a recession.
“It feels kind of scary right now, frankly,” Goldstein says. “Raising interest rates is a blunt tool, and they don’t know exactly what the effects are going to be. And so there is a very reasonable chance that what they are doing is going to cause a recession.”
Goldstein is an executive producer at the audio production company Pushkin Industries, where he hosts the business and tech podcast, What’s Your Problem? Prior to that, he spent 10 years as the co-host of the NPR program, Planet Money. His 2020 book, Money: The True Story of a Made Up Thing, traces the history and meaning of money, including the role of the Federal Reserve in regulating the U.S. economy.
Goldstein says the Fed inadvertently fueled the Great Depression when it raised interest rates in 1931, following the stock market crash of 1929.
“They made it even harder for people to survive, for businesses to survive, for people to buy stuff — and that pushed the economy into the complete collapse of the Depression,” he says. “It is perhaps the worst error in the history of the Federal Reserve.”
Still, given the choice between having the Federal Reserve regulate the flow of currency in the U.S. and delegating the task to Congress, Goldstein sides with the Fed.
“In the long run, it’s reasonable to think we’ll be better off with some amount of short-term pain now that comes from raising interest rates,” he says. “The belief is that politicians who have to answer to voters in a month won’t be able to make those trade offs of short-term pain for long-term gain. And I think that’s a reasonable belief. I think I buy it.”
On the idea of money as a “made up thing”
I came to thinking about money pretty late in my life. I was an English major in college and a newspaper reporter. And it wasn’t really until I got to Planet Money right after the financial crisis, that I really started studying money, thinking about money. … I hadn’t really thought about it, but it seemed like water or something. It just seemed like something that exists in the world and is subject to the laws of physics. And what I learned, what I realized as I started learning more about it, studying it is that is not true at all. Money doesn’t exist in the world until people invent it. That is the fundamental idea of the made up thing. And moreover, people didn’t just invent money once. People, we, have kept reinventing money and reinventing money in different ways with different rules. And all of those rules are really interesting and have interesting sort of social context and social consequences.
On the invention of paper money
By the time paper money shows up, coins have been around for well over 1,000 years. Paper money first shows up in China around 1000 A.D. and it shows up in a very particular place. It shows up in Sichuan province, and in Sichuan province, they used iron coins for money. In most of China, they used bronze coins, but in Sichuan they used a lot of iron. And this is the era when the value of a coin is based on the value of the metal it contains. In Europe they’re using silver coins and gold coins, which are obviously worth a lot, Bronze is worth a fair bit. Iron then, as is now, is not worth very much. So you needed a lot of iron coins to buy anything you needed. For example, a pound and a half of iron coins to buy a pound of salt. I think of it like if you had to go to the grocery store and you could only use pennies. It’s just a terrible thing to use for money.
So some merchant in Sichuan has this idea where he tells his customers, ‘Look, it’s terrible having to carry around all these iron coins. I’ll tell you what let’s do. You leave a bunch of your iron coins with me, leave, say 1,000 iron coins with me, and I’ll write you a receipt like a claim check. This piece of paper is good for 1,000 iron coins at my shop,‘ and people start doing that and then when they want to buy something, instead of going back to get the 1,000 coins from the shop, they just give that claim check, that IOU, to the person they’re buying from, and that piece of paper becomes money and everybody loves it. It’s a great idea. The government sees that happening. The government soon takes over the business of printing paper money and it comes into the world.
On how paper money transformed the Chinese economy
It was a huge deal. It was you know, we don’t think of money or paper money as technology, but we should. It was. It was a tool, in this case, that made a transaction, made exchange much more efficient. There is no mechanical transport at this time, so you have to carry around your vast quantities of iron coins, whatever, on a cart or something. That’s expensive. It’s impractical. It’s easy to get robbed. Now you can transport the same amount of purchasing power with a piece of paper. It’s a crazy breakthrough. And as it happens, this breakthrough comes at this moment in Chinese history and helps to propel this moment in Chinese history, that is this real economic flowering. There is more trade in part because of paper money. And with more trade, you can have more specialization. So people can grow the food that grows best where they live and then trade it across distances. You have urbanization. You have cities of over a million people growing up at a moment when cities in Europe are under 100,000. It’s really this kind of like a proto-industrial revolution. You have technological advancements. It’s this incredible economic flowering that is driven in part — but certainly not entirely — by the advent of paper money.
On how in the early years of the U.S. there was no national currency but thousands of kinds of paper money
There is this amazing moment in U.S. history that kind of peaks in the 1840s or so where there are thousands of different kinds of paper money. … There was no central bank. There weren’t even any national banks. There were lots of little banks given charters by their states, by the states they were in. In a lot of states, any bank that followed a few rules could print its own paper money. And if you can print paper money, why wouldn’t you? And so there was this incredible proliferation of paper money. … The idea was you could bring your paper dollars to the bank that issued them and redeem them for gold or silver whenever you wanted.
But as you can imagine, this creates a lot of problems, problems for people who just want to buy or sell stuff. Like if you’re a merchant and somebody walks into your store with a dollar bill from a bank you’ve never heard of, how do you even know it’s real? How do you know that the bank is legit? How do you know that the bank is sound? Maybe it is a real bank, but they’re going to go bankrupt and you’ll bring your piece of paper in and they won’t be able to give you your gold or silver. And so there arose to solve this problem, these periodicals called “banknote reporters” that were like little newsletters, basically little magazines that listed every bank in America and what their currency looked like, what pictures it had on it, and also a recommendation for whether to take the money at face value or whether to apply a discount rate. … If the bank is unsound, you might say, “Yeah, I’ll take your $5 bill, but I’ll only give you $4.50 credit for it.” And this persisted for decades, kind of amazingly.
Lauren Krenzel and Thea Chaloner produced and edited this interview for broadcast. Bridget Bentz, Molly Seavy-Nesper and Beth Novey adapted it for the web.