The Growing Pains of New Money, Part 3: the Paper Experiment

Every new form of money in history has gone through growing pains: counterfeits, broken promises, lost value, and hard-won fixes. This series tells those stories from the primary sources, because the pattern is easier to see from a distance, and because knowing the pattern is the best preparation for living through it.

The first two posts in this series watched money made of stuff and money made of metal each break and each get patched. This one is about the biggest leap money has ever taken: the day it became paper, which is to say, the day it became almost nothing but promise.

Sichuan runs out of patience

China in the tenth and eleventh centuries had a money problem of sheer weight. The coin of the realm in Sichuan was iron, and iron coins are heavy in a way that reshapes daily life. Buying a modest quantity of goods could require strings of coins weighing more than the goods themselves. Merchants began leaving their coins with trusted shops and carrying the deposit receipts instead, and the receipts started changing hands as payment.

Around the early eleventh century the Song government took the practice over, and the jiaozi, the world’s first true paper money, was born. Numismatists regard it as the beginning of everything your wallet now holds. The idea worked because it solved a real problem, the same reason wampum and tobacco worked. And like them, it arrived long before the rules that could keep it safe.

Marco Polo tries to explain it

By the time the Venetian merchant Marco Polo reached China in the late thirteenth century, the Yuan dynasty under Kublai Khan ran its economy on paper. Polo devoted a chapter of his Travels to the imperial mint, and you can hear him straining to make Europeans believe him. “All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver,” he reports in Henry Yule’s translation, describing the officials who sign each note and the vermilion seal that completes it. The scale astonished him most. The Khan, he wrote, “has such a quantity of this money made that with it he could buy all the treasure in the world” (in R.E. Latham’s translation). And the notes were not optional. Refusing them, Polo noted, was punished as severely as forging them.

The forging had arrived on schedule, just as it had for wampum and coins. Chinese notes carried the penalty printed on the face of the money itself. Surviving Ming dynasty notes, which continued the Yuan practice, spell it out in full: “To counterfeit is death. The informant will receive 250 taels of silver and in addition the entire property of the criminal.” The growing pains of new money, printed on the money.

The printing problem

Paper solved the carrying problem and created a purer version of an old temptation. A government that wants more iron coins must find more iron. A government that wants more paper money only needs ink.

Dynasty after dynasty proved unable to resist. The Song, the Jin, and the Yuan each turned to the printing press when war or deficit pressed hard enough, and each watched its notes sink. The official Yuan history records the repeated currency reforms that followed each round of over-issuance, new notes replacing old ones at steep conversion rates, which is a bureaucratic way of describing savings quietly destroyed. By the time the Ming dynasty gave up on paper in the fifteenth century, China had run the full experiment, brilliance to collapse, several times over. Europe, which had not yet printed its first banknote, would shortly begin repeating the entire sequence as if China had never happened.

The pattern so far

Each new form of money in this series has solved the previous form’s hardest problem. Coins solved the quality problem of stuff. Paper solved the weight problem of coins. And each solution opened a larger version of the same trap: the easier money is to create, the harder its creators must work to restrain themselves. It is worth sitting with what China’s centuries of experiments actually show. The idea of paper money survived every one of its collapses. The failures discredited particular issuers and particular decisions, never the invention itself, and the invention went on to carry the modern world. Growing pains, even fatal ones for a given note, are episodes in a money’s story, not the end of it. In the next post the paper experiment crosses to Europe, where it produces the first banknotes, the first bank run, and a death sentence for the man who started it.

Works cited

Polo, Marco. The Book of Ser Marco Polo the Venetian. Translated and edited by Henry Yule, 3rd edition revised by Henri Cordier. John Murray, 1903. The chapter on the Khan’s paper money.

Polo, Marco. The Travels. Translated by R.E. Latham. Penguin Classics, 1958.

Song Lian et al. Yuan shi (History of the Yuan). 1370. Treatises on currency.

Surviving Da Ming Baochao notes, Ming dynasty, for the counterfeiting penalty inscription. Examples held by the British Museum and the Smithsonian National Numismatic Collection.