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The Chinese were not strangers to paper money.
The first apparent use of paper as money was Chinese - in about 140 BC,
although how it ended is not known.
In the early part of the 11th century iron
coin was in circulation, but it was overissued and
fell in value so that true 'felted' paper was used to represent
inconveniently large monetary multiples. This occurred in Szechuan province
as an innovation of a private bank. Ostensibly the issued notes were
redeemable in three years. 15 similar banks copied the idea and the notes in
issue rapidly grew in number, rather faster than did the reserves of the
banks. By 1032 all the banks which had issued them had failed.
Chinese government paper money was then issued
in 1131 AD to finance military spending and soon afterwards official paper
issue started in earnest. New notes were issued in rapidly increasing numbers
and redemption rights into metal were soon suspended. Notes went into
circulation on the back of public confidence in the institutions of state,
and the provincial governments started issuing in their own name towards the
end of the 12th century.
In 1215 the awesome Genghis Khan overran most
of China. Complete power was not immediate, largely because Genghis set off
to overrun Asia and terrorise even Eastern Europe, but later between 1260 and
1263, when his grandson Kublai was Chinese emperor,
there was an extensive issue of paper money known as the 'First Mongol
Issue', which fairly rapidly depreciated.
It was followed by the Second Mongol Issue,
equally irredeemable, and unlimited in issue, which happened between 1264 and
1290. It was described by Marco Polo in one history's great books :-
"The emperor's mint then is in this same
city of Cambaluc, and the way it [money] is wrought
is such that you might say he has the secret of alchemy in perfection, and
you would be right. For he makes his money after this fashion. He makes them
take of the bark of a certain tree, in fact of the mulberry tree, the leaves
of which are the food of the silkworms, these trees being so numerous that
the whole districts are full of them. What they take is a certain fine white bast or skin which lies between the wood of the tree and
the thick outer bark, and this they make into something resembling sheets of
paper, but black. When these sheets have been prepared they are cut up into
pieces of different sizes.
All these pieces of paper are issued with as
much solemnity and authority as if they were of pure gold or silver; and on
every piece a variety of officials, whose duty it is, have to write their
names, and to put their seals. And when all is prepared duly, the chief
officer deputed by the Khan smears the seal entrusted to him with vermilion,
and impresses it on the paper, so that the form of the seal remains imprinted
upon it in red; the money is then authentic. Anyone forging it would be
punished with death. And the Khan causes every year to be made such a vast
quantity of this money, which costs him nothing, that
it must equal in amount all the treasure of the world.
Furthermore all merchants arriving from India
or other countries, and bringing with them gold or silver or gems and pearls,
are prohibited from selling to any one but the
emperor. He has twelve experts chosen for this business, men of shrewdness
and experience in such affairs; these appraise the articles, and the emperor
then pays a liberal price for them in those pieces of paper. The merchants
accept his price readily, for in the first place they would not get so good an one from anybody else, and secondly they are paid
without any delay. And with this paper money they can buy what they like
anywhere over the empire" Marco
Polo - The Travels
Life under this system was actually extremely
good.
"This was the most brilliant period in
the history of China. Kublai Khan, after subduing and uniting the whole
country and adding Burmah, Cochin-China, and Tonquin to the empire, entered upon a series of internal
improvements and civil reforms, which raised the country he had conquered to
the highest rank of civilization, power and progress. Tranquillity succeeded
the commotions of the previous period; life and property were amply
protected; justice was equally dispensed; and the effect of a gradual
increase in the currency, which was jealously guarded from counterfeiting,
was to stimulate industry and prevent the monopolization of capital. It was
during this era that the Imperial canal, 1660 miles long,
together with many other notable structures were built." Del Mar
Inflation took hold in 1287. The second
Mongol issue continued falling in value until about 1310. At about this time
a third issue replaced the second, duplicating the 5 - 1 ratio with which the
second had replaced the first. Then things changed markedly for the worse.
"Population and trade had greatly
increased, but the emissions of paper notes were suffered to largely outrun
both, and the inevitable consequence was depreciation. All the beneficial
effects of a currency which is allowed to expand with a growth of population
and trade were now turned into those evil effects that flow from a currency
emitted in excess of such growth. These effects were not slow to develop
themselves. Excessive and too rapid augmentation of the currency,
resulted in the entire subversion of the old order of society. The best
families in the empire were ruined, a new set of men came into the control of
public affairs, and the country became the scene of internecine warfare and
confusion." Del Mar
In the final phase of the Mongol dynasty in
about 1350 huge efforts were made to correct the management of the currency
but the situation was beyond repair, monetary paper having been issued in one
form or another by all manner of private, provincial and central government
agencies in what amounted to an explosion of credit.
Upon the demise of the Mongol system of
government which had presided over so many benefits only to see them
destroyed through financial crisis, the usurping Ming dynasty issued yet more
paper currency with the solemn legend "This paper money shall have
currency, and be used in all respects as if it were copper money". There
was no public confidence in the firmness of this declaration and at the
outset the paper traded at 17 : 13 against copper
coinage. Before long the ratio fell to 300 : 1.
It was reported that gold and silver crept
quietly back into circulation. If they did it was deeply unofficial, because
neither was being minted in China at that time.
Paul Sustain
Director and Founder
Bullionvault.com
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