The history of paper money in China began when merchants attempted to work around shortages of metal coins during the Tang Dynasty. Government issued paper money became well established during the Song Dynasty about 860 years ago, or about five centuries before paper money appeared at any particularly notable scale in the West. However, these issuances of paper money were usually only successful for a few decades at a time until strains on the government that issued them led to over-issuance and the eventual emergence of silver as the predominant monetary medium in China.

Tang Dynasty

            The Tang Dynasty in China lasted from 618 to 907 A.D. During this period, copper became scarce. This affected the production of coins because bronze coins were predominant in China from the 3rd century B.C., but bronze is primarily made of copper. At the same time, though they were used to a limited extent as stores of value, neither silver nor gold were monetary metals in China during the Tang Dynasty.

            So, reliant on a bronze coinage amidst scarcer supply of copper, the minting of coins often failed to keep up with economic growth, leading to shortages of coins. Periodic solutions included reducing the amount of copper in coins and mandating that copper utensils and decorations be handed over for the production of coins, essentially bans on non-monetary uses of the metal. At least in private transactions, paper was being used in finance, not only to record credit obligations but also to represent value in a tradable form, through issuances of notes by moneylenders. Merchants could also leave deposits with the government treasury in exchange for notes which were convenient paper representations of value.

Song Dynasty

            Emerging a few decades after the breakup of the Tang Dynasty was the Song Dynasty which would last from 960 to 1276. This dynasty attempted to resolve the monetary problems by controlling outflows of money, primarily to Japan and Korea where Chinese coins also circulated, and by producing more bronze coins. In 1060, a series of economic reforms included a lifting of prohibitions on the use of copper for non-monetary purposes. This encouraged a boom in copper mining which actually made more of the metal available to be used in minting coins. However, in the 1120s, the Song Dynasty lost some copper producing territory in the north to the competing Jin Dynasty and the prohibitions were reinstated.

            Continuing shortages of metal coins caused merchants to issue private notes, called jiaozi (交子), which were exchangeable for iron coins. The government eventually began issuing notes itself after some merchants failed to honor redemptions. These notes, the qianyin (錢引), had their value fixed in relation to copper and iron coins and the state-monopoly prices for iron and salt. The government briefly issued another non-convertible paper money in 1135 but the project was short-lived.

Jiaozi from Sichuan – Source: Garry-saint, Retrieved on www.citeco.fr

            Finally, the Song Dynasty launched a new more widely-circulated paper money, huizi (會子). These paper notes were initially convertible into copper and iron coins. They were issued in 1160 to finance a war against the Jin to the north but holders gained confidence in the notes when the government repurchased surplus notes with bronze coins. The huizi were accepted at face value for about thirty years. The Jin Dynasty also issued its own paper money but the various issuances of notes in China tended to only be accepted in limited regions.

            Around the turn of the next century, new wars afflicted the two dynasties. A civil war in Sichuan began threatening the integrity of the Song Dynasty in 1190. The Jin Dynasty was also being attacked by the Mongols. No doubt helpful, the Song and Jin were also fighting each other. To fund these wars, the governments both issued more banknotes and their value fell. In the Song dynasty, silver began to replace paper money. This is fairly remarkable because up to this point, silver was not considered a monetary metal in China though it was amongst the Mongols attacking them and among other people in other parts of the world.

Yuan Dynasty

            The Yuan Dynasty was the Mongol-led government of China which lasted from approximately 1279 to 1367. However, its rule over large swaths of China began when it conquered the Jin dynasty in 1234. The Mongols enacted their own currency reform in 1260. The new paper money this included, Zhongtong chao (中統鈔), was denominated in units of bronze coins but backed by silver, into which it could be exchanged. This was the first paper money not only with a fixed de-jure value but exchangeable into conventional precious metals. The system accommodated Mongol use of silver in trade with existing Chinese practice of using paper money.

Yuan dynasty 2 guan note with its wood printing plate, 1287 – Source: Tokyo Currency Museum, Retrieved on Wikimedia Commons

            Paper money became the only legal tender in Yuan Dynasty China in 1271. It had to be used to pay taxes and even private trade was required by law to be conducted in paper currency. So, the Mongols replaced a system of many different paper monies, coins, and ingots. The Zhongtong chao was used for payment of taxes, government grants, and expenditures as well as in trade. The paper notes had denominations varying from 10 wen to 2 guan and Marco Polo described the use of paper money he saw on his travels in some detail, this at a time when paper money was alien to Europeans.

“All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver; and on every piece a variety of officials, whose duty it is, have to write their names, and to put their seals. … And the Kaan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasure in the world. With these pieces of paper, made as I have described, he causes all payments on his own account to be made; and he makes them to pass current universally over all his kingdoms and provinces and territories, and whither-soever his power and sovereignty extends. And nobody, however important he may think himself, dares to refuse them on pain of death. And indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan’s dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold”

Marco Polo, Chapter XXIV, ‘The Book of Ser Marco Polo the Venetian Concerning the Kingdoms and Marvels of the East’

Inflation

           However, the Mongol use of paper money was not longer-lived than past systems of paper money constructed by prior dynasties. During the period when it still ruled only parts of China, to finance the conquest of the Song dynasty, and then its designs on the rest of Southeast Asia and Japan, along with the construction of a new capital in Beijing, more paper notes were issued and convertibility was suspended. Civil wars and natural disasters also led to more money issuance.

           In 1308, the government expenditures exceeded revenues by a ratio of approximately 3.35-to-1 and perhaps half of this was funded by issuance of paper money, which by itself exceeded government revenues for that year. This deficit got worse by 1311. Often, the bureaus at which the notes could be exchanged for metal would run out of silver and after 1310, it became officially inconvertible.

           The Yuan Dynasty did not simply abandon paper money upon the suspension of convertibility. In the late 13th and early 14th century, new paper currencies were introduced, such as one in 1287 and another in 1310, and existing currencies depreciated. Still, inflation was relatively moderate. Specifically, whereas in 1260, two guan could be exchanged for one tael of silver this became a 25-to-1 ratio by 1309, or about a 5% rate of depreciation per year, not exactly hyperinflation. So, most trade continued to be done with paper money until around 1350.

           The last series of these Yuan Dynasty notes was issued in 1352. However, these were printed in massive quantity, with approximately fifty million ding (2.5 billion guan) worth of notes printed in 1355 compared to a norm of ten million ding or less. That year, making certain assumptions for the retirement or loss of old notes, the money stock may have reached as high as 160 million ding, or eight billion guan, compared to a relatively steady stock of three billion guan for much of the century before 1340. With this massive over-printing, they more-or-less ceased to circulate by 1356.

Ming Dynasty

            That dynasty was succeeded by the Ming Dynasty which lasted from 1368 to 1644. While the state of paper money was moribund late in the Yuan Dynasty, the Ming Dynasty revived it with new banknotes, called Da Ming Tongxing Baochao. Nevertheless, as with previous experiences, an over-issuance of banknotes to fund government deficits led to depreciation. While one guan banknote was worth one thousand copper coins, or one tael of silver in 1380, this one banknote would be worth only 0.28 of a copper coin by 1535. Also, these banknotes were not as widely used as those of earlier eras and the circulating money stock was complemented by metal coins, which were used in trade even though paper was technically the only legal tender.

Lesson

            Paper money in China had centuries of history before banknotes began to emerge in Europe in the 17th century. They weren’t entirely comparable though since Chinese paper money was issued by the government whereas later Western paper money was issued by banks, either private banks, central banks, or both depending on the country and period. Still, the successes and shortcomings of paper money were apparent in China earlier. In particular, in China, the integrity of the paper money seemed to be tied to the strength of the state. When dynasties were secure, their money tended to be useful stores of value, if subject to manageable rates of depreciation. When a dynasty faced existential crisis, things went badly wrong.

More from the Tontine Coffee-House

           Read more about the transition from metal coins to paper money in China and the issuance of some of the earliest banknotes in Europe by the Stockholms Banco. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts. 

Further Reading

1.      Boeykens, Coralie. “The Banknote, a Chinese Invention?” NBB Museum, National Bank of Belgium, 30 Nov. 2021.

2.      Guan, Hanhui, et al. “The rise and fall of paper money in Yuan China, 1260–1368.” The Economic History Review, Jan. 2024.

3.      Pfaff, Philip. “Paper Money in Early China.” The BRC Journal of Advances in Business, vol. 1, no. 1, May 2010, pp. 55–68.

4.      Polo, Marco. The Book of Ser Marco Polo the Venetian Concerning the Kingdoms and Marvels of the East. Translated by Henry Yule, Murray, 1903.

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