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The Evolution of Cash in China – Part 2

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In last week’s article The Evolution of Cash in China – Part 1 we talked about how the Chinese people initially created alternative forms of currency. We highlighted the birth of cash in very early ages (2500 BC – 1455 BC), the rise of cash in the Zhou dynasty (1046 – 256 BC), the centralization of the money system in the Qin dynasty (221-206 BC), and the birth of the paper money in the Hien-Tsung dynasty (806 – 821 AD). Today we will continue the historic journey up to the Ming dynasty.

The Fraud and Failure of Fractional Banking, Song Dynasty
960 – 1279 AD

The annual Chinese military and civil servant expenditures used three-quarters of the government budget by 1000 AD. During this period of financial strain, the government realized that they could print and spend more money than they had in their reserves.

As this fraud developed, the government kept printing paper money while debasing their currency reserves as they used the cash to pay foreign invasion forces that would not accept the Chinese paper money.

This event was the start of the world’s first fractional reserve banking system, similar to the modern model that is used for global fiat currencies today. By 1032, 15 other Chinese government banks had begun to use this model and printed more paper money than they had cash reserves. A loss of confidence in the monetary system with the Chinese people led to a run on the banks and complete failure for all 16 of them.

The Chinese people abandoned the currency and once again, society returned to using cash for transactional trade agreements. However, Emperor Wang Anshi debased the metal cash supply by issuing loans to farmers in an attempt to stimulate the economy. This lead to another bout of inflation where people were once again forced to carry large amounts of iron to settle debts.

The Song dynasty issued a “new” paper currency in 1189, and the new notes accepted by the people due to the growing tonnage of cash currency needed to complete transactions. It seems that the new leaders did not learn the lessons of the past. The government kept printing until a hyperinflation occurred before the turn of the 13th century and the Chinese returned to cash.

Print to Prosperity, The Mongol
1260 – 1310 AD

The ‘Mongol’ was issued by Kublai Khan in 1260 as official government currency, with all other private forms of money, such as cash and precious metals, outlawed for the second time. However, the Mongol was printed rampantly by the corrupt government, and it was not long before a hyperinflation took hold of the economy.
The government issued a second Mongol in 1264 and a third Mongol in 1310, both with a new 5:1 ratio over the predecessor. By this stage, the currency had lost over 96% of its initial value. A public uproar ensued, and the Chinese people returned to using the metal cash.

Hyperinflation and Precious Metals, Ming Dynasty
1368 – 1644 AD

The Da Ming Baochao (precious note of Ming), was issued by the Chinese government in 1374. The government linked the values of the paper currency to 1,000 cash units, one ounce of silver, or one-quarter ounce of gold. The notes immediately began to lose value as the treasury rampantly printed the paper money into a hyperinflation.

By 1450, the ‘Precious note of Ming’ had lost over 99.9% of its initial value and the government was forced to abolish the note. Silver and copper coins were nominated to take its place, and the Chinese people returned to the use of sound money. This trend continued for the next five-hundred years until the introduction of the first paper Yuan currency in the late 19th century.

Cashing Out The Final Thought

History has proven that fiat currencies always fail. However, it is not the failure of the fiat concept that is to blame. Instead, it is the failure of the government management of the system, resulting in hyperinflation and eventual disbandment of the fiat currency.
Centuries after the creation of the first cash, governments around the world now use entirely fiat money systems, backed by nothing but a promise to repay the bearer and the faith of the people that use them. Maybe something will be different this time around, but history tends to repeat itself.

1 Response
  • Lucca
    January 25, 2018

    Very interesting article. I had no idea cash was first invented in China.

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