The mists that surround stories heard in childhood can lend them a mystic significance, and this is never more true than for those magical tales of socio-economics. Imagine the youngster, eyes open with wonder, hearing yarns of reckless, inflation-happy interwar governments, or pension fund raiders of the seventies. My favourite was even older though: it’s the story of the Knights Templar, and their accidental invention of monetarism.
In the twelfth century, as their power was consolidating and their wealth spiralling, the Knights Templar had literally more cash than they could count – the job of running a ledger of their riches in various strong holdings throughout Spain and France became fulltime and onerous, littered with errors, prone to abuse and eventually impossible to control. Individual Temples, run by members sworn to poverty and keenly benevolent to the devout, lent money to pilgrims, who would then return the donation to organisation, but not, necessarily, in the same place. The solution to this bureaucratic shambles was to arrange for a system of transferable obligations, allowing deposits to be drawn upon between temples – in as much as it matters, they had invented cheques and bond taking.
So far, so clerical. But then, according to this hazily documented story, something else happened: the Templar’s wealth grew vast – its possible they had the largest quantity of negotiable tender of any organisation in Europe, monarchies included – and cheques drawn on their reserves became as good as cash amongst merchants. Either through mismanagement or dishonesty, the number of issued obligations apparently grew larger than the total deposits of wealth that the Templars commanded. This might look like a disaster in the making, but rather than cause ruin, it seems that this became the first centrally underwritten increase in the money supply through negotiable instruments: the new notes matched and even assisted the swift growth of merchant trade, perhaps adding a dash of inflation on the way. Unintentionally, the Knights Templar had facilitated an economic expansion.
Or they may have done: in 1303, before the effects of their proto-economic management could take root, the Templars were unwise enough to refuse a loan to King Philip the Fair of France. This might have been good banking but it was certainly bad politics, and the Order was broken up, their wealth seized, and their novel banking system fell into disarray. Perhaps that’s as well for their reputation: with war looming a change in confidence was likely, and as the Templars’ obligations were called in, any empty promises could well have been uncovered. Money supply management may be another fine weapon in their mythological armoury; a run on their bank wouldn’t have looked nearly so good.