Bob Klein in Economists and Finance, Finance / Banking, Business Investment Advisor Sep 26, 2019 · 1 min read · 3.2K

The Origin of Chinese Paper Money | Bob Klein of Medici Capital

The Origin of Chinese Paper Money | Bob Klein of Medici Capital
Both the earliest forms of currency and the first instances of paper money can be attributed to Chinese innovation. Cast iron coins from the 11th century BCE have been discovered in use from the Shang Dynasty. Around 20 centuries later, the invention of inexpensive paper-making and block printing techniques in the 11th century CE led to the widespread use of paper money in China. While there are a few records of the Tang dynasty utilizing paper money, it wasn’t until the Song dynasty that the government began issuing their own notes and paper currency became widely used.

During the Tang dynasty (618 – 907 CE) merchants began to save themselves the hassle of traveling with heavy and easily stolen metal currency by leaving their coins with trusted agents. These agents would then record how much money had been deposited and give the merchant an authorized promissory certificate that could later be redeemed for the deposited coins.

This method simplified trading along the Silk road and when the Song dynasty (960 – 1279 CE) came into power, they began setting up state-authorized deposit agents. In the 1100s, Song authorities decided to take over the process and issued the world’s first government-authorized paper money called jiaozi. In 1265, the Song government issued a national currency that could be used anywhere across the empire and was backed by gold or silver. These notes quickly gained popular acceptance and were widely used for day-to-day financial transactions.

When the Song dynasty fell to the Mongol invaders in 1279, the Mongols instituted their own paper currency called Chao. Not only was this form of money used across the new Yuan dynasty, but it was also brought to Persia and other parts of Asia by traders. When Marco Polo visited China and stayed in Kublai Khan’s court, he was highly impressed by the idea of government-backed paper money and wrote widely on the topic.

Unlike Song currency, Yuan paper money wasn’t backed by gold or silver but was instead printed as needed. Government officials printed money to cover the government's expenses, which were hard to rein in.  This lead to widespread inflation and Yuan officials eventually began printing conversions of new paper money at different ratios, hoping to stave off inflation. Yet this problem persisted, making their paper money close to worthless until the dynasty collapsed in 1368.

The Ming dynasty (1368 – 1644) began printing unbacked paper money as well, and this had the same result--the value of the paper money was wiped out due to excessive supply.  Thus, they discontinued the program in 1450 in favor of silver. It wasn’t until the 1890s that the Qing dynasty (1644 - 1912) began production of the yuan, the currency currently used in China.

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