Outline for term paper - Mr. Ganse's AP European History Class

I. Introduction

II. Definition

   II.1. Paper money and Banknote

ü  The definition of banknote is a kind of negotiable instrument made by a bank payable to the bearer on demand, used as money. Today, banknotes and paper money refer to the same thing, with the national bank guaranteeing its value. However, when they first appeared, private institutions were guaranteeing the value of banknotes, thus it was quite a different term from paper money.

   II.2. Economic Bubble

ü  A “bubble” in the world of finance is a term applied to an unusually rapid increase in stock prices or the value of some other asset such as real estate.

III. Before the emergence of paper money

ü  Currency that was widely accepted before paper money was of course, coins, usually made up of gold and silver. It was commonly accepted fact that money has to have its real value that equals to its representative value, which is why people chose gold and silver as materials for money, one of the scarcest materials.

IV. Emergence of paper money (Revolution)

ü  What I would like to point out here is that emergence of paper money is not all about changes in materials that comprise money. Emergence of paper money is about its loss of intrinsic value, which allowed mints to print money infinitely. This brought great changes in the use of money and financing by governments and other monetary institutions, thus it can be called revolution.

   IV.1. Initial motive of paper money

ü  First of all, transporting gold and silver, especially in large amounts is very dangerous and costs a lot. The use of paper money greatly reduced the risk. Also, wars that broke out required great amount of money, which was not present in state coffers. As a way to finance wars and standing armies, governments printed paper money, and in the case of England, the government printed money to finance the War of Spanish Succession.

   IV.2. Sweden

ü  In Europe, the first paper money was first issued in 1660 and introduced in Sweden in 1661 by Stockholms Banco, a predecessor of the Bank of Sweden. Since Sweden was rich in copper, it had such low value that extraordinarily huge coins, which often weighed several kilgrams, had to be made. For such reason, Stockholms Banco printed banknotes that look like the first figure.

   IV.3. England

ü 

   IV.4. France

ü  In the early 18^th century France, it was facing huge economic crisis, when it purchased Louisiana. A Scottish economist John Law was appointed Controller General of Finances of France under King Louis XV as a purpose of saving the falling economy, so he was in control of all economic activities of France. John Law then encouraged French government to set up Bank Generale that could issue paper money. At the time, he simply thought that these banknotes could revive French economy, since paper money will lead to active money circulation thus leading to active commerce. This Bank Generale was taken from John Law to French government and was renamed ‘Bank Royale’. Instead, he established a trading company, ‘Company of West’, and later it got bigger and was renamed to ‘Mississippi Company’ which had exclusive trading privileges in France. As the rights of the company got stronger and stronger, number of investors bursted as the value of shares bursted as well.

V. Financial Scandals (Revolution)

ü  Financial scandals such as economic bubbles were inevitable if paper money emerged. Because paper money increased the money supply, it increased inflationary pressures, a fact observed by David Hume in the 18th century. The result is that paper money would often lead to an inflationary bubble, which could collapse if people began demanding hard money, causing the demand for paper notes to fall to zero.

   V.1. Sweden

ü  In Sweden, simply put, the Stockholms Banco ran out of coins to redeem its notes in 1664.

   V.2. England (South Sea Bubble)

ü 

   V.3. France (Mississppi Bubble)

ü  The shares value of Mississippi Company was skyrocketing but John Law had missed something. He kept issuing paper money in order to buy his own company’s shares. In fear, investors started to sell stocks and get gold coins from January 1720, and the stock price suddenly dropped. This rise and fall of the company is overall called Mississippi Bubble.

VI. Interrupted use of paper money (Reaction)

ü  After suffering from such financial scandals, public began to distrust paper money and halted its usage for quite a long period of time. Instead, countries used gold and silver again.

   VI.1. Sweden

ü  In Sweden, the Stockholms Banco, where paper money used to be minted, ceased operating in 1664. In 1668, four years later, new bank was established but it was not permitted to issue banknotes until the 18^th century.

   VI.2. England

   VI.3. France

ü  Upon hearing the news of the total collapse of Mississippi, shares Marais, a highly regarded nobleman, state: "Thus ends the system of paper money, which has enriched a thousand beggars and impoverished a hundred thousand honest men"

ü  In other words, the Mississippi Bubble had lasting effects, creating a distrust of stock companies as well as banks and paper money

VII. Establishment of National (Central) Banks (Reform)

   VII.1. Riksens Ständers Bank (Sweden)

ü  On September 17, 1668, Palmstruch's privilege to operate a bank was transferred to the Riksens Ständers Bank, operated by the parliament. Due to the failure of Stockholms Banco, this new bank was not permitted to issue banknotes until the 18th century. The Riksens Ständers Bank was later renamed Sveriges Riksbank and remains the central bank of Sweden to this day.

   VII.2. Bank of England (England)

   VII.3. Caisse d'Escompte (France)

ü  After the Mississippi Bubble, Paris became France's center of international banking and stock trades, and the Caisse d'Escompte, which is the central bank, was founded in 1776. Here, paper money was re-introduced, denominated in livres.