Paper Money — The Banknote China Invented

Last time, through Rome’s experience, we saw the fundamental wall that metal coinage runs into. As long as value is placed in the material itself, the quantity of money is bound to the metal in the ground, and when finances falter, debasement and inflation creep in. The labor of carrying heavy bronze coins and silver pieces over long distances also grows impossible to ignore as commerce expands. To this impasse, China gave an answer from an entirely different direction. It entrusted value not to the weight of metal, but to the ‘promise’ written on paper — a great leap of credit, in which a sheet that is nothing but paper in itself comes to carry the same weight as coin or silver. In this episode, we trace the road along which paper money was born and grew: from the Tang feiqian, to the Song jiaozi held to be the world’s first banknote, and on to the Yuan jiaochao and Marco Polo’s astonishment.

Sending heavy coin without carrying it — the Tang feiqian

Paper money was not invented one day out of the blue. Behind it lay a pressing inconvenience felt on the ground of commerce. The bronze coins widely used in China were small one by one, but in any sizable amount they became considerably heavy. To do business in a distant land while shouldering a great mass of bronze coins was both dangerous and exhausting.

And so, in the late Tang, around the ninth century, a system called ‘feiqian’ is said to have come into use. This was a means of remittance, it is reported, in which one deposited coin in one place, received a draft as proof, and exchanged that draft for coin at the destination. It is said to have been called feiqian — ‘flying money’ — in the sense that the money itself moved to distant places as if it flew through the air.

What deserves note is that feiqian was not yet a banknote itself. It is best understood as a voucher for receiving deposited coin in another place, not something that circulated widely in the market as a means of buying and selling. And yet the idea that a sheet of paper could carry the handing over of value had certainly sprouted here. It was the first step of a way of thinking that ‘sent’ money by promise rather than ‘carrying’ it.

The world’s first banknote — the Song jiaozi

That sprout grew into a true banknote in Chengdu, in Sichuan under the Northern Song. In this region, bulky iron coins were used, and the inconvenience of their weight is said to have been especially great. In the early eleventh century, the wealthy merchants of Chengdu are reported to have conferred and issued paper drafts in proportion to the goods they held in deposit. This was the ‘jiaozi.’ As long as one could bring the draft and have it exchanged for coin at any time, people, trusting in that, came to hand over the light jiaozi itself instead of exchanging heavy iron coins. This is held to be the first banknote in the world.

In time, limits also appeared in leaving issuance to private hands. If the issuer’s credit wavered, the draft could become wastepaper. So in 1023 the Song government is said to have established an office called the Yizhou Jiaozi Bureau, switching the issuance of jiaozi to state operation. Using a special paper to prevent forgery, fixing the amounts of issue and the mechanism of exchange, and holding a certain reserve of iron coin — a system in which the state guaranteed the paper money was set in place here. The source of money’s credit was handed down from the trust of wealthy merchants to the authority of the state.

The empire of paper money, and the shadow of overissue — the Yuan jiaochao

After the Song, the system of paper money was inherited by the Jin and the Yuan, and its name changed to ‘jiaochao.’ In the Yuan in particular, which ruled a vast Eurasia, paper money is said to have been placed at the center of the economy. Emperor Kublai is reported to have put jiaochao into full circulation, establishing what was in effect a monetary system based on paper money. Unbound by the scarcity of metal, paper money that could spread the same currency into every corner of a wide realm was also a convenient tool for governing a vast empire.

This sight made the eyes of people who came all the way from the West widen. Marco Polo, the Venetian merchant said to have stayed in Yuan China, is reported to have been astonished at the way mere sheets of paper were accepted just like gold or silver and passed throughout the empire. To a Westerner who knew only metal that held value in its material, a world where paper stamped with the emperor’s seal circulated as wealth itself must have looked almost like alchemy. That said, Marco Polo’s travelogue is held to contain exaggeration and hearsay, and the details of his account call for some caution in how they are treated.

But the convenience of paper money went hand in hand with the temptation to overissue. Metal coinage is bound by the quantity of material, but paper money can be printed without limit if one means to print it. Each time finances grew strained, increasing issuance thinned the backing for exchange, and trust in the paper money wavered. In fact, a tendency for overissue and falling value is seen from the Song period onward, and toward the end of the Yuan, the overissue of jiaochao is said to have brought on inflation, and the paper-money system itself lost its trust. The corruption of coinage we saw with Rome last time was repeated on paper too — in the form of ‘printing too much’ instead of shaving the material.

East and West, two roads

Around the time China was accomplishing the bold leap of paper money, the world of the West was still, for the most part, within the feel of metal coinage. Seek value in material, or entrust it to a promise — East and West had been walking different roads where money was concerned. It cannot be said in a sweep which was superior. Paper money carried the danger of overissue in exchange for its lightness; metal coinage carried the limits of weight and quantity in exchange for its solidity. The history of money is also a long trial and error that keeps searching for the optimal balance between these two natures.

And in the world of the West, a new technology and profession for handling money — from an angle quite different from paper money — had been quietly beginning to grow. The business of exchanging money, and of holding and lending it. In the port towns of the Mediterranean, merchants honed methods of settling far-flung transactions on the ledger, without carrying cash. This would in time bear fruit in the vast mechanism of the modern bank. Next time, with Renaissance Italy as our stage, we trace the story of the dawn of finance, as money comes to be ‘deposited, lent, and made to grow.’