China’s earliest historical experiment with paper money is certainly interesting. I am dealing here with the experiments under the Song dynasty (960–1279 AD).
First, a surprisingly important, but neglected, point is that China’s historical monetary system was based mainly on a base metal bronze or brass coinage (Glahn 2005: 65), which can conceptually be understood as fiduciary money (analogous to fiat money). This was the main form of money in China, even though it was often in short supply, and its fundamental role was as a unit of account (Glahn 2005: 66).
Already under the Tang empire (618–907 AD) in the early 9th century the government had created storage depots in the province of Sichuan where merchants engaged in interregional trade could deposit bronze money in exchange for “promissory notes” called feiqian or “flying cash” (Glahn 2005: 65).
Thus the earliest paper monies were private-sector debt instruments analogous to bills of exchange during the later Tang and the early Song dynasty (960–1279 AD). During the Five Dynasties and Ten Kingdoms (907–960/979 AD), the region of Sichuan under the Shu dynasty (like many other regions) developed its own iron coinage, and, after the Shu kingdom was incorporated into the Song empire (in 965), owing to the inconvenience of using iron money, merchants in Sichuan came to use their own promissory notes. These private paper “exchange bills” (jiaozi) were the invention of merchants and circulated as currency (Glahn 2005: 68).
But private abuses led the government to regulate issuance in 1005 and restrict it to sixteen merchant houses in Chengdu that had the financial resources to redeem their bills (Glahn 2005: 68). Despite even this the merchant houses experienced liquidity problems, and in 1024 the government decided to assume responsible for issuing paper currency via a currency bureau, with fixed denominations and a circulation period of two years only (after which the paper bills expired) (Glahn 2005: 69). This system of government issuance proved stable and highly popular with merchants (Glahn 2005: 69).
While the former system I have described above developed in the province of Sichuan, the Song dynasty ruling China at the time also came to use promissory notes (xianqian jiaoyin) by pay merchants supplying goods to frontier military districts (Glahn 2005: 70).
Those paper notes could be redeemed in the Song capital Kaifeng at the Monopoly Trade Bureau for bronze coin. The same Monopoly Trade Bureau had the power to issue its own promissory notes denominated in coin (bianqian), and also vouchers (jiaoyin) that allowed redemption in real goods like salt and tea. Salt vouchers (yanchao) were a popular form of such bills.
Soon these paper bills became negotiable instruments with trading on secondary markets and became a wider medium of exchange (Glahn 2005: 70).
However, in 1117 the foreign Jurgen Jin kingdom overran northern China and captured the Song capital at Kaifeng. Eventually northern China was conquered by the Mongols in 1234. The Song empire was reduced to Southern China (1127–1276).
Yet experiments with paper money continued.
The region of Sichuan became semi-independent and established a paper money called qianyin. Military emergencies and war forced increasing reliance on qianyin paper money which did trade below par, but nevertheless the paper money’s value proved quite stable from the 1130s to the 1190s and became Sichuan’s monetary standard (Glahn 2005: 72). Glahn (2005: 72) reports that qianyin paper money was not redeemable in hard currency, and was a true fiat money. The Sichuan regional government made qianyin fiat money its monetary standard for tax payments and expenditure, which, as Chartalism and Modern Monetary Theory would predict, stabilised its private sector value and use in exchange (Glahn 2005: 72).
Unfortunately, at this time the Southern Song dynasty faced serious military crises, loss of resources, and shortages of coined money. A debt deflationary crisis seems to have afflicted farmers (Glahn 2005: 75).
The Southern Song dynasty noticed the success of the fiat money experiment in Sichuan (Glahn 2005: 75) and in response to monetary crisis the government introduced in 1161 a new paper money called the huizi bill, which was nominally convertible into coin (although in practice perhaps more difficult). Overissue of these led to a redemption using 3 million liang of silver (or 112,500 kilograms) in 1166–1167, and this caused their value to stabilise (Glahn 2005: 75).
In 1168, the Song government reformed the huizi paper money and, according to Glahn (2005: 75), declared it inconvertible into metal money, which made it a fiat currency.
The Song government, like their predecessor in Sichuan, discovered that the key to making its fiat money acceptable was demanding that money in tax payments to the government. In 1170, the government introduced a requirement that 50% of taxes be paid in huizi fiat money, and the state also limited their issue of huizi to stop excessive printing (Glahn 2005: 76).
These measures proved successful: for 20 years the fiat money was accepted by the public and traded privately at close to its nominal value (Glahn 2005: 76).
Even if one wants to count the later experiments with fiat money by the Mongol (or Yuan) dynasty (1272–1368) and the Ming emperors as unsuccessful, nevertheless – far from being a failure – the Song dynasty’s experiment from 1170 to the 1190s with fiat currency was essentially a success.
The fiat money was a workable system while the government maintained popular confidence, demanded its money as taxes, and did not engage in excessive printing of money.
The fall of the Song dynasty and monetary crisis after 1206 was caused by devastating military defeats and civil wars in China, which exhausted resources and induced a fiscal crisis. But, notably, even in 1211 the new issues of huizi fiat money traded at 60% of their nominal value (Glahn 2005: 77), so the loss of value of the paper money was a slow process.
The final fall of the Song dynasty came from the crises from 1230 to 1276, such as excess expenditure from rebuilding the capital after a fire in 1231, rising military costs, loss of territory to the Mongols and finally military conquest in 1276 by the Mongol Kublai Khan (Chinese emperor, 1260–1294).
If the Song dynasty had not faced foreign conquerors and civil war after 1200, it may well have established an enduring fiat currency in China.
Franke, Herbert and Denis Twitchett (eds.), Cambridge History of China. Volume 6. Alien Regimes and Border States, 710–1368. Cambridge University Press, Cambridge, 1994.
Glahn, Richard von. 1996. Fountain of Fortune: Money and Monetary Policy in China, 1000–1700. University of California Press, Berkeley, Calif. and London.
Glahn, Richard von. 2005. “The Origins of Paper Money in China,” in William N. Goetzmann and K. Geert Rouwenhorst (eds.), The Origins of Value: The Financial Innovations that Created Modern Capital Markets. Oxford University Press, Oxford. 65–90.
Glahn, Richard von. 2013. “Cycles of Silver in Chinese Monetary History,” in Billy K. L. So (ed.), Economic History of Lower Yangzi Delta in Late Imperial China: Connecting Money, Markets, and Institutions. Routledge, London. 17-71.