x Abu Dhabi, UAEWednesday 17 January 2018

A sock full of coins can weigh in your favour

All the talk is of a currency war, but how do you actually start one? Try throwing a Thaler at someone's head …

Children using bank notes as building blocks during German's inflation crisis.
Children using bank notes as building blocks during German's inflation crisis.

All the talk is of a currency war but how do you actually start one? First of all, one must recall that currency wars are not new. One of the first recorded scraps in history, as related by Thucydides in his Peloponnesian Wars, recounts how the tyrant Darius dropped a bag of gold coins on the foot of Alexander. Unsurprisingly, Alexander took against this and threw a handful of silver coins, catching Darius a nasty blow above the left eye, which bled copiously.

"Suddenly the sky was wrought by a terrible cry," writes Thucydides in the Oxford translation of 1936, "and gold coins rained upon the populace. In their stupidity, some of the Greeks stopped to pick them up, which led to them being buried by the sheer weight of the coloured metal. It took a visit to the Oracle of Delphi to bring peace to the troubled land but verily here it was proved for the first time since Archimedes that gold weighs heavier than silver, particularly when it catches you around the back of the head."

People who wonder how a currency war starts should realise that it's very simple. You just take a chunk of currency and heave it at somebody from another country. If they in turn throw their own currency back at you, you have a battle on your hands, which can lead to a full-blown war. There have been many currency wars since the time of Darius and Alexander. Of course, it helped when Britain abandoned the gold standard in 1936, as casualties dropped alarmingly. Paper cuts but a bag of coins really hurts.

Take the case of the Germans after the First World War. They experienced a sudden and sharp hyperinflation. To buy a loaf of bread, they needed to cart their cash around in wheelbarrows. When civil war briefly broke out, some of the local population found that it was better to hit somebody with a wheelbarrow than a bagful of paper Reichsmarks. In other words, in a currency war you either need a lot of currency, or a wheelbarrow. In this new looming face-off, it is the Americans squaring up against the Chinese, with the Europeans, as usual, piddling about on the sidelines. Who will win?

In the blue corner, there's the greatest military might the world has ever seen. Its weapons, nicknamed "greenbacks", feature the heads of George Washington, Thomas Jefferson, Abraham Lincoln, Alexander Hamilton, Andrew Jackson, some fellow called Grant, Benjamin Franklin and Michael Jackson. Against such heavyweights, in the red corner, China must rely on the yuan, also called the renminbi. How effective a weapon can it be when nobody knows exactly what it's called? Why does it have two names? 

Truth is often the first casualty of a currency war but we can reveal that the renminbi is the official currency of the People's Republic of China and the yuan is its principal unit. I'm not sure this is clear but, obviously, some devilish Chinese minds have cooked this up to confuse the enemy. And the notes themselves, from 1 to 100, despite their different colours, all carry an idealised picture of a touched-up Mao Zedong. Colloquially, one yuan is called a "feather" but according to William Empson, the author of Seven Types of Ambiguity, the currency is a potent force. "There is nothing ambiguous about being hit around the head by a bag of yuan. I was felled by a wad of tightly folded renminbi during the Boxer Revolution and it was like being hit by a tree." The Chinese, then, are not to be underestimated and will not go into this war unarmed. They also have copious quantities of the US's own weapons, some US$2.65 trillion (Dh9.73tn) of the stuff and counting. As well as a lot of wheelbarrows.

One advantage that the Americans possess is that their weapon is ubiquitous. Everybody has a rumpled dollar bill in their pocket. If their printing presses ever stall, they can do a whip-round and get more from the frightened populace. They are helped by the fact that there are popular songs from previous currency wars such as Buddy, Can You Spare a Dime? and Money, Money, Money. The gold price has increased dramatically in the past few months, a sign a full-scale currency war is imminent. It is like the sound of thunder at a summer picnic. People are stocking up because, in times of trouble, it helps to have some to hand.

As the ancients showed, paper can be deadly but when you're in a tight spot heavy metal is a winner. Duellists in the 19th century discovered this to their cost. It's one thing catching somebody in the eye with the tip of a folded note but a Thaler to the temple really hurts. Who will win? As Confucius said in the 6th century BC, there are no winners in a currency war. On learning that his stables had been burnt down, Confucius asked: "Was anyone hurt?" He did not ask about the horses.

In other words, people are more important than horses and money not at all, especially if it's been burnt. And one recalls his epitaph: "Only the bankers benefit." How true.