fter all the convoys, piracy, and plunder had brought the gold and silver from the New World to Europe, almost none of that massive movement of precious metals ended up where the Europeans expected it to end up. The entire flow lingered only briefly in Europe and then continued eastward to Asia. There is even some evidence that the outflow of gold and silver to the Far East may have exceeded the total imports from America between 1600 and 1730.' During the first 25 years after the establishment of the East India Company in 1600, bullion accounted for 75 percent of all the cargo shipped eastward.

Asia turned out to be a sponge for gold and silver. Only a tiny quantity ever came back to Europe. The reasons for this one-way movement are not obvious, and one is tempted to agree with Kipling that east is east and west is west and let it go at that. But what happened is not that trivial.

The Europeans may have grumbled about the loss of their beloved gold and silver to the East, but their desire for the spices, tea, silk, and other luxuries of Asia was so insatiable that they had no alternative. The people in Asia clearly considered gold and silver to be more desirable than the tin, lead, mercury, woolens, and furs that the Europeans offered for sale. That the one-way trade continued for so long is perhaps evidence enough of how satisfactory it was to the Asians, but another revealing piece of evidence is available: the prices of goods in China, Japan, and India varied very little relative to the precious metals.' If the process had been an unstable one, the Asians would have refused to continue selling their products to Europe or would have demanded a far larger quantity of gold and silver relative to the physical volume of tea, silks, and spices shipped out.

If you believe that the Asians had a peculiar set of priorities, you will have to concede that the priorities of the Europeans were just as strange. Europeans also put the highest value on the precious metals. They would have considered themselves much wealthier if they could have retained the gold and silver and shipped out the useful stuff like iron, tin, and furs. Even as wise an observer as the Scotch philosopher and historian David Hume fell into this trap when he wrote in 1752 that "The skill and ingenuity of EUROPE in general surpasses perhaps that of CHINA, with regard to the manual arts and manufactures; yet we are never able to trade thither without grave disadvantage."3

More than one hundred years before Hume, Thomas Mun, son of a moneyer, master merchant, and key executive of the East India Company, had a keener sense of the reality of this trade: "If those nations which send out their monies do it because they have few wares of their own, how come they have so much Treasure.... I answer, Even by trading with their money; for by what other means can they get it, having no mines of Gold or Silver?"4 Mun was responding to criticism of the East India Company for shipping so much in precious metals eastward, but in fact the transactions proved to be highly favorable to the Europeans. We have already noted that, in contrast to Asia, the price of gold in Europe fell relative to the prices of other commodities. Hence, it was an illusion that the Europeans were getting the worst of the bargain. With the Asians so accommodating by accepting gold and silver, the discovery of America now enabled Europe to satisfy, to a much greater extent than in the past, the longstanding hunger for the products of Asia. Spices cannot be grown anywhere but in Asia, because their development depends on the monsoon rains, while silkworms and tea plants also require a particular kind of climate. The Europeans did learn to convert their earth into fine white china and to execute beautiful designs on it, but the products of the Far East were still esteemed for the mark of status they provided and for the adventure implicit in having obtained them.

Even the Europeans far away in the American colonies were infected with the import virus. The Peruvian silver city of Potosi and the port city of Lima were famous for their displays of silk, porcelain, lacquer ware, precious stones, and pearls from China, while Mexicans paraded around in cottons from the Philippines, silks from China, and calicos from India.'

With all that gold and silver pouring in from the New World, the Europeans were behaving precisely as classical economic theory would have predicted. It was the Asian sponge that was in defiance of theory. The patterns of predictable responses to fresh inflows of money were first set forth in systematic fashion by early economists such as Thomas Mun and William Petty in the first part of the seventeenth century. In 1752, however, David Hume developed the theory more fully in an essay titled "Of the Balance of Trade." According to Hume, the movement of money from one area to another is inherently unsustainable and destined to reverse itself. The money piling up in the pockets of the citizens of the gaining country will encourage them to go out and buy things, while the loss of purchasing power in the losing country will lead its citizens to tighten their belts and buy less; prices will rise in the gaining country and fall in the losing country. This shift in demand will in time reverse the flow of money back to the country that first suffered the outflow. As a result, Hume argued, "It is impossible to heap up money, more than any other fluid, beyond its proper level."6

The sequence of events related to the ransoming of the sons of Francis I was a perfect illustration of Hume's theory-the gold moved from France to Spain in payment of the ransom, squeezing French citizens in the process but simultaneously encouraging the Spanish to spend more money abroad. No wonder, then, that Spain's newly acquired treasure found its way back to France.

Hume used his theory to explain why Spain and Portugal failed to hold on to the gold and silver they imported from their colonies overseas. "Can one imagine," he asked, with his own peculiar use of uppercase lettering, "that it had ever been possible by any laws, or even any art of industry, to have kept all the money in SPAIN, which the galleons had brought from the INDIES? Or that all the commodities would be sold in FRANCE for a tenth of the price they would yield on the other side of the PYRENEES, without finding their way thither and draining from that immense treasure?"7 Hume's theory would also explain why the countries that accumulated gold by exporting to Spain would in turn display a voracious appetite for imports from the East (they were under no obligation to import from Spain), especially as Europeans were able to keep replenishing their supply of precious metals after 1500 from both New World sources and increased domestic production. Thus, the Europeans played according to Hume's rules.

Not so in Asia. Contrary to Hume's hypothesis, the precious metals did "heap up" in China, India, and Japan. Hume may have been correct that fluid cannot accumulate beyond its proper level when the fluid is contained, but what about when the fluid flows into a vessel so enormous that the inflow is meaningless? A seventeenth-century English merchant, echoing a metaphor in Ecclesiastes, made an appropriate observation when he lamented that "Many streams run thither (India), as all rivers to the sea, and there stay."" The economic historian Earl Hamilton has noted that "The East [was] a necropolis of European treasure even in Roman days."' Even today, India is the largest buyer of gold in the world, where gold continues to be the most popular form of portable wealth; the Indians spend more on gold than on cars, two-wheeled transport, refrigerators, and color televisions combined.1'

An identical replay of this phenomenon has occurred in our own times. From 1986 to 1998, Japan exported nearly 60 percent more merchandise than it imported; in 1998 alone, the excess was almost 70 percent. Even though the Japanese spent more on foreign services than foreigners spent on Japanese services, and even though the Japanese made capital investments abroad, Japan's holdings of foreign exchange-the equivalent of the gold absorbed in the 1600s-"heaped up" from less than $30 billion in 1986 to around $200 billion at the end of 1998. This put Japanese foreign exchange reserves above the total combined foreign exchange reserves of France, Germany, Italy, and the United Kingdom in late 1998. Like the Asians of yesteryear, the Japanese prefer to save their money and accumulate treasure instead of going out and spending it on imports from abroad.

Consider what would have happened in Europe if Asia had been less happy about accumulating the precious metals in exchange for their spices and silks, and then consider what would happen today in the United States if the Japanese abruptly decided that adding to their dollar treasure no longer made sense for them. In either case, Asian goods would cease to be available to the West-no more silks, spices, Toyotas, or Sonys-unless the Asians were to reverse their habits and decide that perhaps they would like to acquire goods and services other than monetary assets from the West. That choice was just as critical in earlier centuries as it is today: without the gold and silver to ship out, Europeans would have been denied the pepper and curry, the luxurious textiles, and the magnificent china dishes on which they placed such high values.

Why did the immense quantities of gold and silver that were shipped to China, Japan, and India accumulate instead of provoking a reverse flow of demand for goods from Europe? Did the Asians of the 1500s and 1600s have a natural predilection for the Protestant Ethic, with its focus on the virtue of saving, a set of beliefs that most of them back then had probably never heard of? Were Asians so innocent, or so neurotic, about gold and silver that the sheer joy of ownership was enough to keep them importing useless precious metals in exchange for valuable commodities that they could themselves have eaten and worn? Or was a different set of forces acting upon the Asian scene?

One thing is certain: Asians derived much pleasure from their ownership of gold. Gold's natural attributes of malleability, indestructibility, and dazzling beauty appeal to people in any part of the world. The Asian rulers were just as convinced as Hatshepsut, Croesus, Justinian, Abbe Suger, Atahualpa, and Francis I that gold conveyed both a sense of power and a sense of magical beauty.

Marco Polo is a revealing authority for this view. In 1271, he traveled from Venice to China, remaining in the area for twenty years. Although he did not reach Japan, he obtained descriptions of it from his Chinese contacts. Even allowing for the obvious exaggeration in his many colorful tales, the frequency with which Marco Polo refers to gold is notable. The index of my edition of his Travels contains 26 separate items in which he discusses gold, and nearly as many for silver. The amount of space Marco Polo gives to gold and silver together is much greater than the attention he gives to any of the other Asian products in greatest demand in the West, such as spices and silk.

Most of the time, Marco Polo was in the service of the great Mongol leader Kublai Khan, a man who sent emissaries every two years to the Tartars to select between four hundred and five hundred of the most beautiful girls to join his already overflowing inventory of concubines; the Great Khan made do with thirty or forty girls whom he selected from each biennial group. These served the Khan in rotating groups of six "in his chamber and his bed, ministering to all his needs."" Those women were in addition to his four official wives, each of whom had three hundred ladies in waiting, and each one of those-according to Marco Polo"has in her court ten thousand persons."12 This may be a huge embellishment of the truth, but it contains an important hint about puzzling patterns of Asian foreign trade.

A man supporting a household like Kublai Khan's is clearly not a penny-pinching believer in the principles of the Protestant Ethic. On the contrary, Marco Polo's descriptions of the Khan's palaces are breathtaking. He contends that the palace in the capital city of Cathay was the largest palace ever built, where "there is nothing to be seen anywhere but gold and pictures."" He also describes the magnificence of another ruler, who built a tower in his palace grounds that was covered with gold a full finger's breadth in thickness, and was so completely covered that the structure appeared to be made entirely of gold.

The most amusing employment of gold was in a province under the rule of Kublai Khan called Zar-dandan. In its capital city of Vochan, the men -not the women-made casts of their teeth and used these casts to cover their entire mouthful of lower and upper teeth with gold. In Vochan, money talked!

Marco Polo also reported on Japan, "a very big island [where] the people are fair-complexioned, good-looking, and well-mannered." Gold is found there "in measureless quantities," and one reason they possess so much of it is that "no trader, nor indeed anyone else, goes there from the mainland." He then- describes a palace of the island's ruler, "that is in truth a veritable marvel. Just as we roof our houses and churches with lead, so this palace is roofed with fine gold. And the value of it is almost beyond computation. Moreover, all the chambers, of which there are many, are likewise paved with fine gold to a depth of more than two fingers' breadth. And the halls and the windows and every other part of the palace are likewise adorned with gold."14 Shades of the tabernacle ordered from Moses on Mount Sinai! This is the passage from Marco Polo's Travels that spurred Columbus on when he reached Cuba and thought he was in Cipangu (Japan).

Gold seems to have been almost everywhere Marco Polo visited. In Vochan, the town of the lovely teeth, gold was so plentiful that one ounce of it exchanged for only five ounces of silver at a time when one ounce of gold in Europe fetched upward of ten ounces of silver and the gold/ silver ratio would approach 1:14 after the big American silver mines brought about a radical increase in the European supply of silver relative to gold. 'I In Tibet, where the natives used salt for money and were "very poorly clad, in skins, canvas, and buckram ... there are rivers and lakes and mountains in which gold-dust is found in great quantity.... The province produces plenty of... cloth of gold."16 Marco Polo also mentions gold in India, where he claims it was so plentiful that it exchanged on a ratio of 1:6 for silver." In addition to modest indigenous supplies of gold, India imported large amounts of both gold and silver in the 1500s and 1600s in exchange for cotton, most of it coming in via the major trading post of Malacca in Malaysia."

Everything that we have seen so far reveals that Asians did not perceive gold as money in the same way that Westerners viewed it. Even before Croesus, people in Europe and the Near East were using gold as money, first in bars and then in coins. For at least two thousand years before Columbus discovered America, Europeans had viewed gold coins as the ultimate expression of financial might and sophistication. Coinage, however, democratized gold, because it circulated among members of the public. Asian rulers held no such notions. They shared the Western delight in gold's beauty and what it signified in terms of power, but they considered gold too important to be used as money that would be passed around from one dirty and ignoble hand to another. Releasing gold to public circulation would dilute the power of the state.

As a result, most Chinese money over the centuries has been fabricated out of materials of little value.* Small amounts of gold coins were minted after the sixteenth century, but they were used primarily for ceremonial purposes, such as being thrown on occasion at professors when the students approved of their lecture. 19 China did not issue any coins of precious metals in meaningful amounts until 1890, and then in silver, although Mexican silver pesos-of all things!-circulated in some quantity in China between 1700 and 1826.211

This conception of a monetary system had a long tradition in China. In 255 BC, when the many feudal Chinese states were united by a great general named Qin Shu Huangdi into a single political entity, Qin promptly declared himself the emperor and built the Great Wall to protect his domain (Qin is pronounced "Chin" and is the derivation of the word China). It was his tomb that was guarded by the famous terracotta army discovered by archeologists at Xian in 1974. At that time, the longstanding Chinese coinage system-which probably predated the use of coins in the West-consisted of awkward cast-bronze pieces that looked like hoes, knives, and cowrie-shaped shells. Qin replaced these forms with cast-bronze round coins punctured in the middle with a square hole. These small base-metal coins came to be known as cash, the Tamil word for money that is now the common expression reserved for ready, liquid money. Although the denominations and weights of the coins changed over the centuries, the familiar characteristic design of round Chinese coins with the square holes remained unchanged for over eight hundred years.''-'

The holes in the coins made it possible to string together a large quantity for carrying or for trading: the coins were made out of such low-value material that a trader or his customer had to handle many coins even for transactions of modest size. If some of the coins had been minted from metals of more value-at least in the eyes of the beholders-to provide for larger transactions, fewer coins would have been needed and carrying them around would have been less burdensome. As in the West, the coins could have been carried in pockets or purses.

Some things are never learned, as the frantic coin counting for ransoming Richard I and the sons of Francis I reminds us. The following story about Chinese money in World War II shows that even in modern times people have failed to understand simple principles about how to denominate whatever is in use as the means of payment.

Chiang Kai-shek's embattled government in World War II was based in Chongqing (spelled Chungking in the 1940s), far in the interior of China with no access to the seas in any direction. All aid from the Allies, from food to tanks, had to be flown in over long distances, often passing through Japanese anti-aircraft fire or attacks by Japanese fighter planes. As Chungking had no facilities to print currency, all the Chinese paper money was printed in the United States, which meant that the critical materiel of warfare had to share space with currency in the cargo aircraft. China was also suffering from a vicious inflationary spiral caused by a severe shortage of the necessities of life and massive amounts of currency being paid out to troops and workers. With prices rising so rapidly, stacks of paper money were absorbing more and more precious cargo space.

The American economic advisors to Chiang urged him to order currency in larger denominations, because what had once cost $1 was now costing $10 or more. It made no sense to keep shipping one-dollar bills when ten-dollar bills would buy what one-dollar bills had once bought, and the ten-dollar bills would take up one-tenth the cargo space-and in time one-hundred-dollar notes could replace ten-dollar notes. Yet the currency orders never kept pace with the inflation. The planes continued to be crammed with excessive amounts of low-denomination notes occupying cargo space desperately needed for food, oil, weapons, and ammunition. Similar myopia in adjusting denominations to price increases explains the stories about people running around with wheelbarrows full of currency in the German hyperinflation of the 1920s.

About one thousand years after Qin, during the reign of Hien Tsung (806-821), a severe shortage of copper induced the emperor to use sheets of paper for money in place of bronze coins. If there was no point in making payments with useful stuff, the emperor reasoned, why not go all the way and adopt paper? This newfangled idea appears to have been more of a historical accident than a stroke of financial genius, but the long perspective of history suggests that Hien Tsung's inadvertent innovation should join printing, gunpowder, and the compass among China's most enduring contributions to the civilization of the world. Hien Tsung not only passed on his invention to posterity; his succes sors also paved the way for the inevitable route that most paper money systems have followed: overissue and uncontrollable inflation.22

The lessons were learned in China early on. In a book called A Treatise on Coinage, published in 1149, a historian named Ma Twan-lin warned in strikingly modern terms that "Paper should never be money [but] only employed as a representative sign of value existing in metals or produce.... The government ... wished to make a real money of paper, and thus the original contrivance was perverted."23 We shall see that this argument reappears almost verbatim in Britain in the course of the Napoleonic Wars, dressed in different clothes but containing the same substance. About six hundred years had to pass, until 1455, before the Chinese decided that they could control their money supply more effectively with metallic coins than with paper money, but they were still so far ahead of the West that another three hundred years would pass before printed banknotes became common in Europe.

Marco Polo was so impressed with the paper money of China that he considered it a kind of magic. As he characterized it, Kublai Khan's "mint ... is so organized that you might well say that he has mastered the art of alchemy. "24 The paper for the money was manufactured out of mulberry tree bark and cut up into various sizes to reflect the differing denominations; a note representing one thousand coins measured nine by thirteen inches-an awkward size but light as a feather, while one thousand coins weighed eight pounds. The proper officials then wrote their names on the papers and stamped them with the seal of the Great Khan. At that point, according to Marco Polo, "The procedure of issue is as formal and authoritative as if they were made of pure gold or silver.... The money is authentic.... Of this money the Khan has such a quantity made that with it he could buy all the treasure of the world."25

Marco Polo reported that the Khan ordered every payment, everywhere in his empire, to be made in paper currency. Then Marco Polo delivered the punchline that exposed why this money worked as well as it did and why he thought that the Khan could buy all the treasure of the world with it: "And no one dares refuse it on pain of losing his life. "26 There's legal tender for you! But no force was involved, according to Marco Polo. Everyone was "perfectly willing" to accept these papers in payment, "since wherever they go they pay in the same currency."27 The system provided a neat system for the government to finance itself.

The Khan did not restrict his expenditure of the paper money merely to current operating expenses of his government. He deployed his power to greater advantage. Whenever traders arrived in his domain with pearls, precious stones, gold, silver, or other valuables, or when any town possessed gems or precious metals, they were required to surrender all their treasure to the Great Khan. These people accepted the paper money in exchange for their valuables "willingly," because they could use it to pay for the goods they bought throughout the Great Khan's dominions. By this means, Marco Polo concluded, "The Great Khan acquires all the gold and silver and pearls and precious stones of his territory," and this is how the Khan "has more treasure than anyone else in the world."" This "willingness" may have had to do with more than the Great Khan's raw power, although surely that was a necessary condition for the success of the paper money. China's huge landmass may have made its economy more self-sufficient than any individual country or city-state in Europe. Thus, concerns about acceptability of the paper money abroad, if any, were at least secondary.

What Marco Polo failed to point out was that the Khan thereby accumulated assets that were accepted as assets anywhere in the world, while the people who held paper money in exchange held assets that were accepted only in the Great Khan's dominions. Seen from that perspective, Marco Polo was correct that the Khan had mastered the art of alchemy. His paper money turned into gold-at least at his palaces.

Was the exchange unfair? In 1933, the U.S. government prohibited the ownership of monetary gold by any individual, company, or political entity except the federal government itself (jewelry and works of art were excluded from this prohibition). All monetary gold within the borders of the United States or imported into the United States had to be turned over to the government and converted into dollardenominated bank deposits or everyday coin and currency. This law was still less restrictive than Kublai Khan's, because foreign governments and central banks such as the Bank of France or the Bank of England were free to convert their dollar balances back into gold-until August 15, 1971. At that moment, President Nixon joined up with the Great Khan. As the expression of the time put it, the gold window was shut down. Even foreign governments and central banks could no longer exchange dollars for gold. In his own fashion, Richard Nixon had mastered the art of alchemy.

Meanwhile, the story in Japan was much the same as in China. The Japanese used gold for adornment, not money. Unlike many other forms of art, the work of the goldsmith in Japan developed late and was never as notable as Japanese pottery, sculpture, or painting. When it came to money, the Japanese just copied the Chinese practice, as they had already copied art and the alphabet from China, except that the Japanese clung to metallic money rather than converting to paper.

Copper was the first metallic money, followed by bronze, which economized on the copper. When the Chinese changed over to paper money in the ninth century, they had no more use for their metal coins, so the Japanese obliged them by importing the superfluous coins. For the next few centuries, the Chinese would continue to supply the Japanese with all the bronze coins they needed. As trade was considered demeaning in Japan, and the economy was in any case less developed than in China, the demand for money was correspondingly smaller. Marco Polo himself had observed that no traders ventured from Japan to the mainland, which meant that foreign trade played no role in the Japanese economy until much later on.

Around 1600, a rising price for gold provoked a minor mining rush in Japan, to satisfy increased demand in China as well as the Japanese emperor's desire to advertise his power. Portuguese shipping was then just beginning to reach the Japanese seas, and so a modest amount of foreign trade was developing. The Portuguese exchanged Chinese silks for Japanese silver, which they then sold in Macao, Malacca, and India in exchange for spices until the Japanese spoiled a profitable triangular line of trade by cutting off the Portuguese. Why? The Portuguese had tried to convert the Japanese to Christianity.29

The Japanese finally began issuing their own coins around this time, but these home-grown specimens were still copies of the Chinese money and were even inscribed with the appropriate Chinese characters. Japan also started issuing a limited amount of gold and silver coins in oval or rectangular shapes to suggest the ingots that had circulated for a short time as money in the Middle Ages, but these had such high value-one was worth about a ton of the copper coins in daily circulation-that they were used for the most part in ceremonial transactions among the nobility."' The stones of Yap would have functioned more efficiently! Even in the latter half of the nineteenth century, after Admiral Perry's arrival, the Japanese coinage continued to copy foreign coins, this time of American and British money; yen, which means "round coin" in Japanese, was also the word they used for dollar, with sen, the word for a copper coin, standing for cent.31

To return to the main question: Why did the gold and silver of the West move in only one direction toward the East? What was going on in Asia that led people to value precious metals more than the food, clothing, and home decoration that they shipped in such volume to Europeans?

One answer has already been suggested. From the viewpoint of the Asians, the supplies of gold and silver they were importing were money only in a very indistinct sense. They did not perceive the precious metals as something that people use to exchange for something else, either now or at some point in the future. Rather, the Chinese, Japanese, and Indians considered the precious metals to be commodities-that is, goods with a genuine use value that rendered these goods worth keeping for their own sake rather than as a means of payment. Gold was for decorating a bride, for baubles, for ornaments, and, most important, for hoarding. Indeed, burying treasure in the East was akin to conspicuous consumption, similar to the insatiable demand for fancy gold watches in our own time.32 This view of gold explains why Asia was a sponge for precious metals rather than one of Hume's nations where "it is impossible to heap up money, more than any other fluid, beyond its proper level." The Asians were not playing the money game.

What, then, was the utility of gold and silver in the eyes of the Asians? As with everyone else, beauty and resistance to rust were important elements. Adam Smith charmingly observes, "A silver boiler is more cleanly than a lead, copper, or tin one; and the same quality would render a gold boiler still better than a silver one. The principal merit [of the precious metals], however, arises from their beauty, which renders them peculiarly fit for the ornaments of dress and furniture. No paint or dye can give so splendid a color as gilding. "33

That is not all: scarcity matters, too. Smith refers to rich people who never appear to themselves so rich "as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. ... Such objects they are willing to purchase at a higher price than things much more beautiful and useful, but more common. 1114 Wealthy Asians were no exception to this general rule.

The strangest feature of gold is that there has never been a moment when it has ceased to be scarce. There have been moments when the supply of gold increased faster than the supply of silver, and gold's price fell relative to the price of silver (to say nothing of the dramatic drop in the price of gold after disinflation took hold in the world economy of the 1980s), but the price nevertheless has always remained high enough to indicate that gold was far from a glut on the market. Steel sells for 2¢ an ounce; gold sells for more than ten thousand times as much. '

Gold remains a definitive mark of opulence. Thus, the mystique of gold as a store of wealth, which is critically dependent on its scarcity, has added lustre to gold as a symbol of power, whether it accents the halo of a saint or covers the roof of a palace, whether it dangles from the ear or surrounds the neck, and whether it fills the room of a captive emperor or the storage cells of the Federal Reserve Bank of New York. Darius must have had great fun in his bathtub.

In the long run, the cupidity and stupidity of human beings are what motivate the drama, although nature contributes by distributing gold arbitrarily and unevenly around the globe. There was never a time when gold was not in constant demand for ostentation or for hoarding.

Hoarding is similar to buying an insurance policy. Like an insurance policy, hoarding gold has a cost, for the idle metal earns nothing. However, you sleep better knowing that you hold some kind of a hedge against the chance that the catastrophes you fear may actually occur. This motive is as powerful among poor peasants and laborers as among kings and princes. But the insurance policy can work only as long as everyone else continues to consider gold an item of highest value. For that essential condition to be met, people must continue to agree with one another that gold is scarce.

The distribution of income in Asia provides a second answer to our question about the strange equilibrium that kept gold moving in the eastern direction and useful commodities such as spices and silk moving to the west. Evidence developed by modern economists indicates that average per capita wealth in Asia in the sixteenth and seventeenth centuries was close to average per capita wealth in Europe.35 Adam Smith himself pointed out that China was one of the richest and most fertile countries in the world.36

Averages can be dangerously deceptive when the dispersion around them is wide. The per capita figure for Europe is of some value as at least suggestive, but the per capita measure for China, or any part of Asia at that time, obscures the reality that a tiny number of people lived in an environment of luxury and indulgence while the masses existed at levels that were horrible even by the standards of the poorest people in Europe. Adam Smith was eloquent on the subject. In describing conditions in Canton to illustrate his point that the poverty in China far surpassed that of "the most beggarly nations in Europe," he wrote:

The subsistence which they find there is so scanty that they are eager to fish up the nastiest garbage thrown overboard from any European ship. Any carrion, the carcase [sic] of a dead dog or cat, for example, although half putrid and stinking, is as welcome to them as the most wholesome food to the peoples of other countries.37

Under conditions like this, the gold-consuming nobility of China were aware of no loss to themselves in shipping the products of their land out to Europe, because the privileged class was so small and wielded so much power that their consumption could be, and usually was, as conspicuous as they wanted it to be without any sense of prodigality on their part. Gold and silver, on the other hand, had a limitless market in Asia, for both ostentation and insurance against uprisings and war. What looked like an irrational exchange with the Europeans at first glance thus becomes an understandable set of transactions when viewed from the perspective of class structure and tastes. Similar observations apply, with only minor variations, to Japan, India, and the island kingdoms of the Pacific.

As Marco Polo did not have a graduate degree in economics, we can pardon his hyperbole when he says that stamping the paper money of the Great Khan made the process "as formal and authoritative as if [the notes] were made of pure gold or silver.... The money is authentic." Nevertheless, his evaluation of the paper currency of thirteenth-century China was keen enough to touch on matters that will concern us repeatedly in later pages, topics such as the interaction between specie-money in metallic form-and money in its more ephemeral forms such as paper, bookkeeping entries, and computer blips. Marco Polo's respect for Kublai Khan's stamp on the mulberry currency also raises important questions about money issued by the state and its relationship to the private money that enters today into the huge volume of transferring funds, either by check or electronically, from one private bank account to another.

Kublai Khan's stamp bestowed authenticity and the attributes of gold and silver on his paper money only because Kublai Khan's state was all-powerful-in China. Marco Polo missed that essential point. No one in England would have been able to use the Chinese notes to pay for a pint of beer at the local tavern, and no French king could have paid ransoms with it. Hence, this money did not have the true attributes of gold and silver. In fact, no one outside China would even have known what to do with the mulberry notes unless they were planning to go to China to buy some silk or vases. Otherwise, the Khan's currency was valueless outside China.

People demand that their money must have value. In fact, valueless money is not even money, because it would not serve as a means of payment and would be nothing that anybody would want to accumulate or consider as wealth. Metallic money, or paper money convertible into metal, is usually considered to have more value than a system that uses paper only. As Ma Twan-lin reminded us, "Paper should never be money [but] only employed as a representative sign of value existing in metals or produce." The presumption here is that metals are more limited in supply than paper, which means that metallic systems should prevent money from becoming valueless.

Yet there is a strong superficial resemblance between Croesus's turning out great supplies of gold coins by mining the Pactolus and a Chinese emperor who turns on the printing press. Croesus and the emperor both produce an expansion in the supply of money. The difference is in the international consequences. A gold coin would buy a pint of beer anywhere when foreign paper notes would not. Nevertheless, from a domestic viewpoint, the similarities between Croesus and the emperor are much closer than they appear at first glance. The world just thinks about them differently.

The policies of the Great Khan demonstrated that the power of the state is a strategic element in establishing and sustaining value. The "continentals" printed by the government of the American colonies during the Revolutionary War became a metaphor for worthlessness, but the dollars of the federal government, authorized by the Constitution, have been acceptable for over two hundred years and throughout all our wars. Lydia, Genoa, Florence, and Venice were not just economic powerhouses but also had strong local governments before they issued their famous gold coins, but who ever heard of a gold coin issued by Manchester or Liverpool? The French have changed their monetary system on many occasions over the centuries, which is probably why French peasants have earned the reputation of being congenital hoarders of gold. The pound sterling has the longest uninterrupted history of all, just like the English monarchy. Afte the breakup of the Soviet Union, the Russians had a hard time establishing the international acceptability of the ruble, while after German unification the East Germans had the great advantage of exchanging their currency for the firmly established deutschmark.

Since we left Offa and his silver coins way back around 800, the English have played a subordinate role in our story. It is now time to move England to center stage, for developments there during the years from 1700 to 1810 materially expanded the role of gold in the financial system, formalized it, and shaped the broad structure of the world economy as we know it today. In the course of recounting these events, we shall hear an echo of Hien Tsung's inadvertent innovation of paper money, because the key incident was just as unplanned and just as historic in its consequences.