Light Verse for a Heavy Universe

1.

Most first-time witnesses are stunned by what happens at the wet end of a Fourdrinier machine, the giant contraption used in various forms for nearly 300 years of papermaking.

Pouring through a sluice at the top of a moving wirecloth belt comes an unpromising slurry that looks like dirty water and, in fact, is — water mixed with digested wood fiber, resin, sizing, and pigment.

As drainage and suction remove the water, the transformation is so sudden it seems uncanny: at one instant it’s liquid, the next it’s paper.

2.

Having turned almost miraculously from a liquid to a solid, paper then proceeds to liquefy everything else.

Taking the form of money, securities, contracts, instruments of equity and debt — a revolution in financial vehicles which may ultimately go down in history as among the subtlest, most profound inventions of man — paper serves to liquefy tangible assets of every description, up to and including the most massive, immovable buildings and whole sections of the earth’s surface. In the age of mortgage-backed securities, even real estate is gathered into pools.

3.

The equations are different; but financial assets parallel the substances of physics and engineering in their classification as solid, liquid, and gas. Tangible, fungible, vaporous. (”Gas” comes from the Greek chaos, which is what ensues when a glowingly described equity or property turns out to be puffery and smoke.)

Civilization’s material progress is largely the story of finding ways to channel assets into their most productive forms and uses. To accomplish this, tangibles and fixed assets had to become progressively more liquid. Given the right idea for a means of capital deployment and exchange, things of value need not sit idle just because they are not in the right place at the right time.

An owner of grazing land in Argentina can mortgage part of it to provide funding for a shopping center in Portugal. A school district in Pennsylvania can borrow against future tax revenues by issuing municipal bonds to build a high school, and a buyer of the bonds might invest the dividends in the stock of a company that uses the proceeds to modernize a shoe factory in New Jersey or Malaysia.

More exotic instruments soon follow. Once paper joins forces with money, an astonishing variety of paper assets is sure to ensue — a powerful engine of prosperity, though at the inevitable price of recurring manipulations, speculations, scandals, panics, and crashes.

Early forms of money revolved around commodities such as tobacco, sugar, and salt. It was beans for the Aztecs, oxen in ancient Greece (pekus, thus “pecuniary”), elephants in Ceylon, feathers in the New Hebrides, cows among the Maasai.

But when you’re trading in oxen or elephants, it’s hard to make change. So a valuable commodity which might represent the accepted standard of value was not always the actual medium of exchange. In Borneo, human skulls were the most highly valued possessions and thus the measure of comparison for what something was worth — like the gold standard of later western societies. But when it came time to get down to business, everyday transactions were more likely denominated in palm nuts and pigs.

As a general trend, currencies evolved from barter in directly useful goods to surrogate money of less useful and more ornamental materials, such as silver and gold. Earlier forms tend to be commodity money, measured in weights: the original pound, for example, or the drachma, which means a handful and originally referred to a handful of iron nails. Commodity money was gradually replaced by debt money — the note or bill — which might or might not be convertible into a specified hard asset, as U.S. bills were formerly redeemable in silver. Increasingly, convertibility was dropped, and currencies relied on confidence. One party honors a piece of currency on the assumption that the next party will accept it — or, as one critic complained, currency is accepted because it’s accepted.

But that trend took several thousand years, and a couple of key inventions were needed along the way.

The China Syndrome

When Marco Polo arrived at Hangchow in 1280, he was startled to see merchants trading in paper money. It was an utterly alien concept. Not only was folding money unheard of in Europe, paper itself was hardly more than a rumor. It had just been introduced by the Moors into Sicily and Spain but was little understood and certainly not to be trusted as a permanent medium, like vellum, for important documents.

Sources for vellum were calfskin, kidskin, or the uterus of a sheep. The arts of curing and inscribing vellum resided mainly in the monasteries. Supplies were tight and costly, and production of hand-printed manuscripts was painstakingly slow.

In various other cultures, people were writing or painting on papyrus parchment, cloth, bark, clay tablets, and stone, none of which would have led to the invention of printing. But in China, paper had already been around for over a thousand years. It was first made in 105 BC by Ts’ai Lun, who brewed a mix of fibers from the macerated bark of mulberry trees, along with scraps of hemp, old rags, and fish nets.

And there the new technology remained, for another eight centuries. But in 751 AD, in an attack on the Arabs of Samarkand, Chinese forces were repulsed and some of their soldiers taken prisoner. Several of them had apprenticed in the art of papermaking. With crops of flax and hemp and plentiful water, Samarkand had all the raw materials for paper, and thus the paper trail headed westward, ultimately to Moorish Spain.

Still, no one had thought to use paper as money until the Chinese tried it in 1232. They were able to do it because they had also invented a form of printing. This consisted of engraving wood blocks in relief with one or more pages of text, then inking the block and rubbing a piece of paper against it with a dry brush. It was the craft of printmaking more than the technology of printing, but it was high speed reproduction in its day.

The European Version

When Gutenberg and others assembled the means for modern printing, they were able to do what would have been impossible for the Chinese. Instead of a language written in several thousand ideographs, 15th century Europeans had an alphabet of 23 letters. They were able to mold and mass produce the letters and then use and reuse them repeatedly as movable type.

It was Johann Gutenberg who put all the pieces together around 1440 in Mainz. Paper was becoming plentiful, and Gutenberg mixed his own inks. Trained as a goldsmith, he knew enough about metals to develop an alloy of lead, tin, and antimony that would cast easily into letters and would hold up under repeated impressions. He invented a variable-width mold so that i’s and l’s would not have to float in the same space needed for an m or w. And he adapted a wine press for printing.

His genius did not extend to finance, nor were many financing alternatives available. A fellow townsman, Johann Fust, loaned Gutenberg 800 guilders, then 800 more two years later, but soon tired of waiting for a return and foreclosed on the printshop and its equipment. It was Fust and his son-in-law, Peter Schoeffer, who completed and marketed the splendid bibles and psalters for which Gutenberg is known.

Still, the revolution was in place, and things would never be the same. The advent of paper, then printing, had not only blessed the world with books, it had also set in motion what one scholar has called “the papyrization of assets.”

The path had not been a straight one.

Paper Tigers

Back in China, where this worldwide phenomenon had been born, printmaking continued but paper money had ceased to be. A few years after Marco Polo had brought the news from Hangchow back to Europe, the Chinese found themselves drowning in a flood of paper money, outstripping their treasury reserves and forcing an end to this practice until modern times.

At first blush, the Chinese experience sounds like the invention of inflation; but the sad fact is that the debasing of currency was already a well established art.

The Romans, for example, established the first international currency when they minted the silver denarius beginning in 270 BC. Three centuries later, the denarius was still 92% silver and was recognized throughout the western world. But its silver content was cut to 87% under Hadrian, 68% under Marcus Aurelius, and in successive steps down to .5% under Philippus and, finally, .02% under Quintillus in 270 AD. At the same time, the government was handing out free food daily to the entire populace, including a pound and a half of bread per person. That and circuses.

These days, events move more swiftly but in the same direction. IMF figures show that from 1945 through 1983, the world’s central banks held physical gold reserves roughly equal to their paper assets. But as of 2004, their gold reserves were worth only .04% of paper holdings. Which empire is about to collapse, we haven’t been told.

The chronic problem in Rome was an extreme lack of liquidity. The wealth of the ruling classes was tied up in land, which was nearly impossible to convert into cash, except by borrowing, and borrowing under the Roman system could be socially and politically dangerous.

The Unfelt Need

Patricians needed cash to pay the help and to finance a lavish stream of gifts in order to maintain status and political support. The government had to pay the soldiers who kept the city solvent with the fruits of their conquests, despite a steady drain of gold to India in return for spices.

Such were the perceived needs for liquidity. Despite all of Rome’s advances in art, architecture, governance, law, philosophy, and inspired public works, the notion had not emerged that the same inventiveness, applied to the machinery of capital, might have fostered the enterprises and the technology to keep the empire strong.

Progress was not an easily accepted concept. The famed architect and builder Vitruvius thought that too much emphasis on progress was a waste of time and energy. He pointed out that all the essential technology was already in place: the ladder, pulley, windlass, wagon, bellows, catapult, water-mill, glass blowing, bronze casting, and the arch.

So who needed financing for new machines?