Sunday, February 2, 2014

Paper Money: Great Invention of China -- Part 2

Jiaozi
Paper money is a crucial part of an economy and even our everyday lives. It is use to pay our allowances and salaries. It is used to pay our needs and wants. For the whole economy, it saves consumers from the burden of carrying large amounts of heavy coins. It is also a way to stimulate the economy. However, if there is too much paper money in circulation, its value decreases and prices could also increase. This effects are not new. During the infancy of paper money, it suffered the same effects.

Paper money first appeared in China during the Tang Dynasty. Under the Tang, paper certificates were used by the private sector. Then the imperial government also began to use these paper certificates in form of bons that were dubbed Feiquian or Flying Cash. During the time of the Song Dynasty, the use of paper money expanded, especially in the Szechuan Province were bronze coinage were scarce. The Jiaozi was the paper money that proliferated. With the arrival of the Jurchen invaders, the Song Dynasty moved southwards. They then organized a new currency called the Huizi.

The Jurchen barbarians, by then established in the northern China, established their own dynasty, the Jin. The Jin was amazed of the currency of the Song and began to emulate it. They allowed former Song currency to be used and in 1154, they began to issue their own paper currency called the Jiaochi. A Bureau of Paper Currency was set up to issue the Jiaochi. It was modelled after the Song paper currency. Similar to the Song, they placed also an expiry date to their currency. However, the difference was that the expiry date of the Jiaochi was double of the Song money. Instead of three years, the Jiaochi was usable for seven years. During the infancy of the Jiaochi, it can be used in par with bronze coins. However, the scarcity of bronze coin made the Jin to make the Jiaochi the sole medium of exchange throughout the empire. Its expiry date was removed as well as its convertibility to bronze coin was removed. Many feared of the volatility of paper money, the financial market went into confusion. The confusion made a dire effect on the economy and reforms were made, including the re-allowing the convertibility of Jiaochi to bronze coins. 

In the last decade of the 1100’s, the Jin went into chaos. The Yellow River dikes collapsed and caused mass devastation to the agriculture along the river. To exacerbate the condition, in 1194, the Mongol Horde under Genghis Khan threatened the northern frontier of the empire. The army was mobilized to stop them. However, lack of bronze coin resulted to salaries being paid with paper money. The increase of money supply circulating caused the depreciation of the currency. In 1215, the Jin capital of Zhongdu fell in the hands of Genghis Khan. The dynasty moved their capital to the former Song capital of Kaifeng. In Kaifeng, they prepared for the defense of the remaining territories. Funds were raised by issuing bond like certificates called the baojuan. The measures to raised fund and defense of the last Jin territory was ill-fated. Kaifeng and the Jin Dynasty fell almost 15 years later, in 1234.

As the Jin Dynasty and the other paper currency user, the Southern Song, fell in 1279, paper money survived and reached the peak of its used during the next dynasty, the Yuan.

By 1210’s, most of Northern China was under the Mongols. The Mongols took noticed of the use of paper money and allowed its circulation. In 1236, after the fall of the Jin, under the advice of Yelu Chucai, the conqueror of Jin, Ogdei Khan began to issue their own paper money called also the Jiaochao, which was backed by silver. By 1260, the jiaochao became widely circulated. Kublai Khan, who founded the Yuan Dynasty even ordered that taxes were only to be paid in paper money. Furthermore, the paper money was banned from being converted into gold and silver. Also, silver and gold were barred from being use in trade or face the punishment of death. However, the usual problem persisted. The Jiaochao became over circulated causing its value to plummet. Then in 1272, the situation prompted Kublai Khan to issue the Second Mongol Notes. The old notes were allowed to be converted for the new notes under the ration of 5 old notes for 1 new notes. The government also imposed the same policy. All golds and silver coins were confiscated and replaced with paper, trade would be conducted with paper money under the punishment of death.

When the Mongols build an empire across Asia, the Silk Road flourished and allowed westerners to visit China. Many went to China to trade goods and buy porcelain and silk. One Venetian, however, visited China and would write a book that would amazed many in the west – Marco Polo. Marco wrote about the use of paper money in China. He was amazed on how a piece of paper could buy a lot of goods. Another foreigner, the great Muslim traveler, Ibn Battuta also took noticed of the paper currency when he visited China in 1345.

The Mongols almost created a union of Asian nations. From China, the Mongols rode across the whole continents. They reached as far as Russia and Turkey. Never, such many culture and religion came under one group of people’s rule. In 1294, Kublai Khan decided to impose the paper money to Persia, experimenting to create one currency throughout the empire. However, the experiment failed. Trade almost collapsed in Persia because of Kublai Khan’s policy.

In 1309, over circulation caused the value of the second Mongol Notes to depreciate. Reform of the paper currency was undertaken in form of the circulation of the third Mongol Issue. Again, the conversion rate of 5 old notes to 1 new note. The third Mongol Note lasted over half a century. However, over issuing became an issue and by 1356 it was worthless.

In 1358, the Yuan Dynasty fell in the hands of the Red Turban rebels who established the Ming Dynasty. In 1374, the Ming issued their own paper money called the Ta Ming T’ung Hsing Pao Ch’a or the Great Ming Precious Notes. The same issues persisted and by the entry of the 1400’s there were 300 paper money for one coin. Later on, in 1455, tired of hyperinflation, the Ming Emperor Jingtai Emperor, the use of paper money ended. And the currency moved towards silver coins.

The used of paper money by the Chinese was revolutionary. Never a piece of paper had a value. They showed the problems of using paper money, over circulation and hyperinflation. From these mistakes, other learned lessons and allowed the present to enjoy the luxury of having the money with high value to pay for many items.

See also:

Bibliography: 
Caprio, G. Handbook of Key Global Financial Markets, Institutions, and Infrastructure. California: Elsevier, 2013.

Cheng, L. Banking in Modern China: Entrepreneurs, Professional Managers, and the Development of Chinese Banks, 1897 - 1937. New York: Cambridge University Press, 2003. 

Goetzmann, W. & K. G. Rouwenhorst. The Origins of Value: The Financial Innovations that Created Modern Capital Markets. New York: Oxford University Press, 2005. 

Kaul, V. Easy Money: Evolution of Money from Robinson Crusoe to the First World War. New Delhi: Sage Response, 2013.

Lewis, M. China's Cosmopolitan Empire. USA: Harvard University Press, 2009. 

Weatherford, J. The History of Money. New York: Three River Press, 1997. 

"History of Chinese Invention - The Invention of Paper Money." Computersmith.com. Accessed February 1, 2014. http://www.computersmiths.com

Hewitt, M. "China's First Experience with Paper Money." DollarDaze. Accessed February 1, 2014. http://dollardaze.org/blog

"Paper Money." ChinaCulture.org. Accessed February 1, 2014. http://www.chinaculture.org

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