The World's First Paper Currency: Ancient China

Where did paper money come from? Despite it seeming like a modern invention, its origins go back to ancient China. And despite it now being hard to think of a world without paper money, in 1968, Americans could still redeem their U.S. dollars for silver, and international residents could convert their U.S. dollars into gold up until 1971. What led to the invention of paper money and the fiat standard? Where money has value just because the government says so. This video will examine how paper money developed in ancient times. Ancient History While the ancient Egyptians valued precious metals, they used barley as their form of money. Barley does not meet the current economic definition of good money with regards to portability, homogeneity, durability, divisibility, and stability of value. The Old Testament discussed how Abraham bought a burial plot for 400 shekels of silver, indicating that early people soon moved their money from barley to silver. The Babylonians also developed a love for silver, even though the metal could not be used for much at the time. Gold was found in Lydia in the 7th century BC, but gold would still be subservient to silver until modern times. Gold had a lot of characteristics of good money, but it was found in such small quantities before modern mining techniques. Silver was the main standard for a long time because it obeyed the laws of good money. In the 5th century BC, the Greeks found silver and minted their famous owl coin. The coin was so widespread that it can still be found and bought today. The Greek coin naturally became the international standard currency of choice. The Greeks were captured by the Romans in 146 BC. The Romans had been short on silver before defeating Greece. With these riches, they progressed from a society that used iron bars for money to minting their own silver coins, called the denarius. The Roman denarius would replace the Greek coin as the international standard. However, this metal currency could not be maintained. Barbarians would cut off Rome's access to silver mines in 235 AD, and the Roman government debased its currency, meaning over time it put less silver in the coin. To mitigate the declining value of its currency, the Roman government tried to create a new coin called Antoninianus, which worked as well as it sounds, and the government said it was worth 2 denarii. But the silver content was not double. This loss in faith of the currency accelerated the decline of Rome. Despite the technology of the Roman Empire, the Chinese were the great power in ancient times. The Chinese viewed the Romans as primitive, and only Marcus Aurelius was mentioned in Chinese history. The Chinese would be the first to use paper money. The Rise of Paper Money in Ancient China The ancient Chinese did not value gold and silver as highly as the Romans. They loved jade, which is a very hard green stone. For example, if you hit a diamond and a jade stone together, the diamond could crack, but the jade would not. Therefore, jade is ranked as one of the toughest stones, while diamonds are one of the world's hardest. This love of jade still lingers on in China, and gold and silver would remain subservient to jade and bronze for a long period of time. Another reason that silver remained subservient was because China does not have much silver. With the lack of silver and gold mining techniques not being invented until modern times, bronze became China's most valuable metal. As more advanced mining techniques developed, bronze soon became too common. During the heart of the Copper Age, the Zhou Dynasty began. The Zhou Kingdom stretched for over 3,000 miles at its height, and it used copper and iron as money. However, money was often represented as symbolic pieces, such as a knife or a spade. The Zhou Dynasty fell, and the short-lived Qin Dynasty discontinued knife money and standardized coins with a hole through the center. The hole allowed merchants to put a string through it, allowing people to carry many coins, again indicating that coins in China were in very large volumes. During the Han Dynasty, the Chinese would invent paper, and by 100 AD, the Chinese were able to produce paper on a large scale. In contrast, it would take the Europeans another 1,000 years to invent paper, As the Chinese economy grew, merchants were carrying around heavy strings of copper coins. The Han's felt casting a smaller, lighter coin, known as the Wu Zhu, would alleviate the problem. The Wu Zhu coin would endure from 118 BC to 621 AD. The Liang Dynasty experimented with iron coins in the Sichuan Province. Sichuan was a backwater and frontier province, and copper would often exit to other countries, causing economic havoc. At first, two iron coins were worth one copper coin, but by 557, it would take ten iron coins to get the same number of copper coins, showing inflation could easily be created. China was very advanced by the time Emperor Gaiju, the first ruler of the Tang Dynasty, came to power. China's population was 50 million, and the kingdom was massive, many times larger than Mesopotamian kingdoms. With riches in bronze, merchants were often carrying around thousands of coins, which were not only susceptible to theft, but they were also inconvenient to carry. The Tang's solution was paper receipts, which became known as flying money, because these receipts could easily fly away during a voyage. It could be argued that these paper receipts were not paper money, they were simply receipts representing copper. The merchants could redeem these receipts at a provincial chancellery. The chancellery functioned like a transfer bank, storing metal cash and redeeming it for a 3% fee. However, by the end of the Tang Dynasty, the government got greedy and increased the fee to 10%, and the use of flying money decreased. Because of the Tang's greed, people were once again transacting with heavy copper coins. In 850 AD, Chinese mints were producing over 327,000 strings of copper coins per year, with each string containing 1,000 coins, weighing 6.4 pounds. And each 1,000-coin string was worth only one ounce of silver. Milton Friedman, a famous economist, stated, inflation is always and everywhere a monetary phenomenon. But inflations aren't limited to paper money. The Tang Dynasty fell, and the Song Dynasty succeeded it in 960. Emperor Tai Chi reunited many areas in China and put them all under one rule. At its height, this was the Song Empire. The Song Dynasty made advances in food cultivation and were remembered for its culture and art. The Chinese population would grow to over 118 million by 1120. However, as prosperity increased, so did the number of coins in circulation. Worse, despite having so many coins, copper was exiting on its border in Sichuan. Sichuan was a backwater province located on the western border of China. This wasn't a great scenario for the Sichuanese. Coins were simultaneously heavy, but were also frequently in low supply, because it was much cheaper than bronze. However, because iron was even more numerous than copper, Sichuanese citizens had to carry 1.5 pounds of iron just to buy a pound of salt. This inconvenience would necessitate a new invention. In 993, the Sichuanese revolted, shutting down the Iron Mint. During the revolt, citizens began to use paper money, which was lighter, but still redeemable for iron. After the revolt was quelled, paper money would become the main currency. Initially, the Song's gave money printing power to only 16 institutions. These institutions functioned like deposit banks, as customers would deposit strings of iron and would receive paper. Despite not lending, these institutions were skimming off the top, leading to a panic. And in 1016, the Song government had to bail out these too-big-to-fail firms. After the next banking panic in 1022, the money storing banks were nationalized. After nationalization, the government issued the Jiaozi, the first government-sanctioned paper currency. In order to support its value, the government allowed these notes to buy necessities such as salt and liquor at government-owned stores. However, the government was already not keeping sufficient reserves. The Song's would keep a lower reserve of iron coins to paper money than the 16 private institutions that failed in 1022 did. Despite these risks, the Sichuanese economy boomed, which led the finance minister to believe that printing money had led to the success. He said that one person hoarding 100,000 copper coins deprived, say, 10 people of spending those 100,000 copper coins. He was mistaking coins for wealth. These mistaken ideas would give the Song's confidence to slowly expand the Jiaozi beyond Sichuan. With continued success, caution turned into runaway money printing. By the end of the first decade of the 1100s, there was over 20 times as much paper money than in 1024. This inflation was partly responsible for a civil war, However, the Jin also lacked copper and was on the border with Mongolia, so the Jin continued to use paper money. The Jin's currency was known as the jiaochao. To promote use of its paper money, the Jin emperor promised his paper would always be completely backed by precious metal, though this backing proved difficult when the Jin's were attacked by the Mongols in 1211. Facing a northern invasion, the Jin's turned to all-out money printing to fund its war effort, and the jiaochao collapsed. By 1234, the Jin empire fell to the Mongols. The southern Song dynasty would survive Mongolian conquest for now, but the Song continued to weaken. With a lack of metals and a loss of their northern part of the country, the Song issued the world's first fiat currency in 1135, meaning the paper money had value because the government said so. However, no one trusted the currency, and the Song quickly removed it from circulation. In 1160, the Song's issued a new currency called the huaizi in various parts of the empire. To increase confidence, the government supported the currency by buying up surplus paper and exchanging it for copper. The huaizi traded around its metal value from 1160 to 1190, but in 1190, civil war broke out in Sichuan, and the Jin, seeing their chance, also invaded. A civil war and Jin invasion greatly weakened the power of the Song, and the huaizi note greatly depreciated. As the paper currency was collapsing, the Song tried to persuade citizens to use these worthless paper notes by perfuming them. By 1232, the huaizi had depreciated by nearly 75%. This didn't stop government from trying to declare the money's value. The Chinese courts said citizens had to make exchanges based on historical values, but citizens ignored these decrees, and by 1225, the huaizi was worthless. The Mongol Empire, now led by Genghis Khan's grandson, Kublai Khan, saw this weakness and invaded the Song. In 1271, Kublai founded the Yuan dynasty, which means center or origin. By 1279, the Yuan had captured all of the Song's former empire, despite having only one-twenty-fifth the population size. Perhaps because of geographical proximity, the Yuan treated the Jin's fairly well, while the Song's were treated as second-class citizens. After capturing the Jin Empire, the Mongols studied the Jin's use of paper money, and they cautiously used it. Kublai backed early Yuan issuance of his paper money, the zongtangqiao, with silver. Early success of the zongtangqiao gave the Yuan confidence to print more money. In 1271, paper became the dominant form of money in northern China. By the time the Mongols captured the Song, paper money was enshrined as their currency of choice. However, capturing the Song was difficult, and the Yuan would need to issue paper money without 100% backing. The Yuan captured the Song in 1279, but its currency started to slowly weaken. Failed wars with Japan in 1272 and 1281 also hurt its wealth and status. In each war, a typhoon helped the Japanese, killing the Yuan at sea. At the Yuan's height, Marco Polo, a Venetian merchant, visited and recorded the history of paper money usage in its empire. Polo's importance of transferring knowledge to Europe will soon be discussed. The Yuan Empire tried to get a handle on its currency situation by re-issuing the paper notes at a 5 to 1 prior value, meaning 5 notes before were now worth 1. This new currency would be known as the zaiyuanqiao. The Mongols used an iron fist to back this new currency, by stopping private transactions of non-paper money, and they forbade transactions in precious metals. However, the Mongols continued to weaken after Kublai's death in 1294. In 1309, the Mongols issued their third currency, called the zaiyuanqiao, with little success. Near the end of its rule, prices had increased nearly 20 times. The Yuan tried one more paper currency, which rose inflation to 300 times. The Yuan's currency was valueless, and its empire crumbled. Despite the spectacular collapse of the Yuan currency, its use of paper money was transferred to the Europeans through Marco Polo. Polo began his travels at 17, and it took him four years to reach Kublai Khan. Inside the Yuan Kingdom, Marco earned many promotions and became a trusted advisor to Kublai. He was granted permission to leave the Yuan Empire in 1291, and he made his dangerous journey back to Venice by 1295. Polo had witnessed the wonders of the Yuan Empire and recorded his story in his book, The Travels of Marco Polo, which became one of the world's first bestsellers. A famous chapter in his book, How the Great Khan Causes the Bark of Trees Made into Something Like Paper to Pass for Money All Over His Country. Polo described paper money in a very positive light, saying it was issued with the carefulness of gold or silver, and that citizens readily accepted its value. He left before the collapse of the Yuan's currency, and his celebration of paper money would help spread the knowledge to Europe. Notable explorers like Christopher Columbus would venture off in 1492 with a copy of his book. The Great Mongol Empire had thus passed China's knowledge of paper money to the Europeans. So what happened to paper money in China? The Ming Dynasty tried and failed to issue a new paper currency. This failure led it to completely suspend the issuance of paper money in 1450. Ironically, despite being the first country to use paper money, China's prolific failures led it to be one of the last modern countries to accept a fiat standard only in 1935. Despite its many failures, here is something to think about. When the Ming Dynasty suspended fiat currency in 1450, China was the light of civilization. However, by the 1800s, Europeans described China as a society that did not progress, and China's economy would remain frozen in time for the next 500 years with little advancement. A British captain in the 1830s was quite shocked when he visited China. He said, It's absolutely remarkable that there is no paper currency in China, not even the simple instruments of bills of exchange. Silver helped China avoid the colossal failure of paper money, but it also froze China's economy in time. Our next video will discuss how paper money emerged in Europe. If you like this video, please subscribe and our next video in this series will be released next week.