Last week, when I heard that the ECB led by Mario Draghi expanded its quantitative easing program even more, it reminded me of a fascinating incident that happened in 13th century Asia. The similarities between that period and contemporary monetary policy are striking. And there are plenty of valuable lessons to learn!

The Legendary Genghis Khan

Many see the policies currently set forth by central banks as the way to beat the crisis. Yet, history teaches us that we should take these claims with a grain of salt.

Not only did 1206 mark the year in which sugar was first mentioned in Europe, but it was also the year the legendary Genghis Khan started to expand his empire. From what is now Mongolia, he crossed into China and Central Asia, and kept going all the way to Central Europe in the west, the Persian/Arabian Gulf in the south, the Sea of Japan in the east, and far into Siberia in the north. The Mongol Empire was, at its height, twice as large as the Roman Empire.

In order to govern an area this vast, Genghis Khan divided his empire in what you could call states. One of those states was Ilkhanate, which would now span Iran, Iraq, Syria, Turkey, and Afghanistan.

Tree Bark

Ilkhanate was assigned a new governor in 1291: Rinchindorji Gaikathu. He was known for going on spending sprees: he 'liked to live the good life.' But as a result, Ilkhanate’s treasury was empty within three years!

Gaikathu would have done what every ruler before him, and after him, has done: raise taxes. Unfortunately, that wasn’t an option for him, because a virus had killed a large part of the livestock. Not that he cared about the fate of his subjects, but it did mean that he couldn’t get any financial resources from his people. Fortunately, one of Gaikathu’s staff advisors also knew something about, what was then, recent history.

And that advisor told him about what Chinese rulers had done not too long ago: using tree bark as money. The bark was imprinted, and thus paper money was born! Its biggest advantage? A near-endless supply of money (the only limitation is the amount of trees availabe). By the way, Marco Polo had also witnessed and described this Chinese experiment.

And with this suggestion, Gaikathu’s problem was solved! He put the wheels in motion right away. All people producing gold and silver coins were told (forced!) to stop. Everyone had to turn over his gold and silver to the government, and, in exchange, were given new banknotes made out of tree bark. The punishment for failing to do so? The death penalty. The use of the new banknotes was compulsory. Should you refuse to use these new banknotes, interfere with its issuance, or even destroy some of them, you would receive a sentence even worse than the death sentence. How? Not only would you receive it, but your whole family would!

The Collapse

The result was that the economy of Ilkhanate went through a total collapse in a short time. A lot of shopkeepers closed their doors, people decided to leave Ilkhanate, and the black market, the only place where you could trade without having to use the new banknotes, grew exponentially. The prices of goods denominated in banknotes went through the roof. And the irony of it all? Gaikathu had introduced the banknotes with the promise to expel poverty, and to lower prices.

Gaikathu’s attempt to create prosperity with a lot of uncovered printed money wasn’t the first attempt in history. As previously mentioned, China has also tried its own quantitative easing program (or that’s what we call it today), just as has happened in the Roman Empire, the French Revolution, and Germany during the Weimar republic. In modern history, unlimited money printing was almost considered as a weapon!

And what have we learned from all these events? A monetary system based on trust in an issuing government is never sustainable, because politicians are never able to resist the temptation to print too much money. That’s why it is better to not give governments the option to print money in the first place.

Considering this, one would wish there would still be advisors today like those consulting the third caliph in the Arabic world. Around the year 640, the caliph came up with an idea to make banknotes using camel hides (so that he could make a lot of it). His advisors changed his mind though, when they explained that soon there would no longer be any camels left. Not only does massively printing uncovered money fail to lead to the desired result, it simultaneously causes great harm and disruption to society.

The Death Penalty

There are different forms of financial repression by law: unlimited money printing, the compulsory use of banknotes, and the compulsory delivery of gold (on April 5th 1933, U.S. President Franklin Roosevelt, under his presidential order 6102, prohibited the possession of gold and thereby criminalized it). Back then, these measures were presented as the only way to beat the crisis and to create prosperity…and that sounds strangely familiar. It has been the official policy set forth by governments and central banks in the West for the past few years. 


People frequently tout that the only way to get out of the current crisis, and to avoid its future recurrence, is to print money. Among others, the European Central Bank (ECB) is working hard on realizing exactly that. What in the past had started as a metaphor, to start tossing money around, now seems a serious plan if I should believe the pleads of many followers of Gaikathu policy.

If I see how the ECB’s policy is being glorified, I cannot avoid asking myself: if so many find this good policy, then why are we only using it during times of crises? Why isn’t it part of our regular policies? After all if it improves our wealth and prosperity, then it seems ridiculous to reserve these policies for times of crises. Of course, the reason why printing money isn’t part of conventional policy is not only that it is not good policy; it is a lethal policy! I have no reason, at all, to assume that the ECB’s experiment will end differently than Gaikathu’s experiment did.

Oh and, if you’re asking yourself how Gaikathu ended up: he was deposed by his subjects, and then executed. And the advisor that had whispered his plans to Gaikathu? He was, literally, pulled apart by an angry mob. Someone should tell Gaikathu’s story to central bankers and the people who advise us to print money to cure our ill economies, instead of telling them fairy tales of how quantitative easing is good and prudent decision making.


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