(This article originally appeared at Harvard Business Review)
What happens when there is a mass loss of confidence in the financial system? This very contemporary question was put in unexpected historical context for me this Christmas by a book I was given, A History of the World in 100 Objects by Neil MacGregor, Director of the British Museum. It is based on one hundred radio lectures given by MacGregor (which can be heard here) about items from the Museum’s collection, each chapter discussing a specific artifact. Some of these are mundane, such as an arrowhead or a drum, while others are grand, such as the Rosetta Stone or a Welsh gold cape. For someone like me who has spent his life designing products and thinking about how objects acquire personal and cultural meaning, it was a perfect gift.
One of the first artifacts I thumbed to, a 400-year-old Ming banknote, has striking parallels to today’s world, where there is broad disillusionment with the financial system and a lack of confidence in its future.
The Ming note is an early example of paper money, something that today we take for granted. But if you step back and think about it, paper money represents a remarkable act of faith that we carry around with us every day. It’s an abstraction of coins made from precious metals, which are in turn an abstraction of goods such as crops and livestock. This pattern of abstracting further and further away from “real” things and “real” value has continued to the present day, giving us credit cards and collateralized debt obligations (not to mention casino chips).
MacGregor writes, “[The] ability to convince others to believe in something they can’t see but wish to be true is a trick that has been effective in all sorts of ways throughout history. Take the case of paper money: someone in China centuries ago printed a value on a piece of paper and asked everyone else to agree with them that the paper was actually worth what it said it was…The whole modern banking system of paper and credit is built on this one simple act of faith.”
Paper money is certainly more convenient than barter and gold coins, but the abstracted leap of faith requires something to back it up in order for sufficient quantities of people to buy into it. MacGregor quotes Mervyn King, the Governor of the Bank of England, who jokes that “I think in some way the right aphorism is that ‘evil is the root of all money’!” since trust in whether the money would be properly backed was the key problem, leading the state to become the issuer of money. King continues, “And then the question is, can we trust the state? And in many ways that’s a question about whether we can trust ourselves in the future.”
The Ming note is printed with the statement that it is “To Circulate for Ever” — quite a vote of confidence from the treasury, and presumably one necessary for such an innovative approach to payment and livelihood. Paper money was part of a larger overhaul of the financial system by the first Ming emperor after the previous dynasty — the Mongol Empire — had collapsed. Similar to how fiscal innovations in recent years were justified by statements about economic growth and prosperity through home ownership, Ming’s new financial instruments were described as being for the social good (in their case, funding education for children).
But the new system didn’t work very smoothly and eventually the whole thing collapsed, though not without an early experiment in quantitative easing (i.e., printing more money) which led to devaluation of the currency. Mervyn King says, “Once people realized the link had broken down, then the question of how much it was worth was really a judgment about whether a future administration would issue even more, and devalue its real value in terms of purchasing power. In the end this money did become worthless.”
From Bernie Madoff to derivatives to the housing bubble to dubious AAA credit ratings, we continue to find new ways to encourage people to make financial leaps of faith. Have we reached a breaking point where the abstraction has gone too far, and is too complicated for 99% of people to understand what they’re signing up for, that we must backtrack to more conventional methods? And has the level of trust in private and state financial institutions sunk so low that most people now feel there is no accountability or responsibility for the promises made, or that sound decisions will be made to guarantee “circulation forever”?
I believe that we have. As the Ming dynasty shows us, a properly operating financial system is both symbolic and symbiotic. It doesn’t matter if the ones driving the system trust it and the artifacts representing it, if the majority of the public doesn’t, the system will crash. The well of trust is so poisoned today that it’s hard to see how we can continue forward as is, though unfortunately, relatively little has been done at a structural level to make the necessary changes.
Can we pull ourselves out of a Ming nosedive, or will we ignore history and repeat it?