The Origins of Paper Money in China: From Song Jiaozi to Ming Silver

The world’s first sustained experiments with paper money took place in imperial China. The first state-issued paper currency, the jiaozi, appeared in the Northern Song around 1024, more than five centuries before the first European paper money. The Song experiments were followed by the Yuan paper money issued under Mongol rule, which circulated at a national scale and reached chronic levels of inflation. The early Ming, under the Hongwu emperor, made one more attempt to impose paper money on the empire, before the late Ming abandoned paper in favor of silver. The history of paper money in China is, in many ways, the story of a brilliant idea that repeatedly failed to live up to its promise — and that, even in its failures, transformed the economic history of the world. The broader context of Chinese currency and commerce, including the coin system and the credit infrastructure, is in the currency and commerce deep-dive, and the larger economic story is in the overview of the imperial Chinese economy.

The Sichuan Origins

The first paper money in the world emerged in the Sichuan Basin in the early eleventh century, as a response to a chronic shortage of copper. Sichuan was a populous, productive, and increasingly commercialized region, but it was cut off from the main copper-producing areas, and the state-supplied copper coin was chronically insufficient for the volume of trade. The standard solution was iron coinage, and Sichuan had a long tradition of large iron coins of relatively low value: bulk transactions required the handling of enormous weights of iron.

The merchants of Chengdu began in the early eleventh century to issue deposit receipts for the iron coin. A merchant could deposit a hundred strings of iron coin with a wealthy merchant house and receive a paper receipt that could be used to settle large transactions or exchanged for coin on demand. The deposit receipts were negotiable: they could be transferred from one merchant to another in settlement of a debt, and they were accepted at face value in many of the major markets of the region. The system spread, and by the 1020s the major Sichuan merchant houses were issuing thousands of strings’ worth of paper receipts each year.

The state, recognizing both the convenience and the danger of the system, took it over. In 1024, the Northern Song government established the jiaozi (the first state-issued paper money) and gave a monopoly of issue to a state bureau. The jiaozi circulated in denominations from one string to ten strings of coin, was backed by a reserve of real coin, and was issued in limited quantity. The system worked reasonably well for a few decades, and it spread to other regions of the empire.

The Southern Song and the Huizi

The Southern Song, after losing the north to the Jurchen Jin in 1127, was forced to depend even more heavily on the south for revenue. The Southern Song government issued a complex system of paper notes, including the huizi, in a range of denominations, used to pay soldiers, contractors, and merchants. The state generally attempted to limit the supply and maintain confidence, and the notes circulated at a stable value for long periods. But the chronic fiscal needs of the Southern Song, fighting the Jin in the north, tempted the state to issue more notes than the economy could absorb, and periodic crises of confidence forced the state to declare older notes worthless and issue new ones at a discount. The late Southern Song saw a partial return to coin-based commerce.

The Yuan Printing and the Problem of Hyperinflation

The Yuan Dynasty, established by the Mongols and ruling all of China from 1279 to 1368, inherited a sophisticated paper-money system and made a determined effort to use it as the foundation of the imperial monetary system. Under the influence of the Muslim finance minister Ahmad Fanakati and his successors, the Yuan issued paper money (the Zhongtong yuanbao jiaochao and its successors) on a national scale, made it the only legal tender, and required all taxes to be paid in paper.

The Yuan system worked, in a limited sense, for several decades. The Mongols had a fiscal advantage the Song lacked: they controlled the silver- and gold-bearing regions of Central Asia, and they were able to back the paper with a metallic reserve. The system also benefited from the integration of the Mongol world empire, which allowed the state to enforce the paper’s acceptance in the conquered regions. By the mid-fourteenth century, however, the system had broken down: chronic fiscal needs, the cost of suppressing regional rebellions, and the simple fact that the state could print notes more easily than acquire metal led to runaway inflation. The paper currency became effectively worthless by the late Yuan, and the fall of the Yuan in 1368 was a major blow to the credibility of paper money in China.

The Hongwu Paper Money and the Ming Return to Silver

The Hongwu emperor (Zhu Yuanzhang, r. 1368–1398) attempted to impose paper money on the empire as the only legal tender. The Da Ming Baochao (大明宝钞) was issued in large denominations and was not convertible to coin or silver. The result was predictable: the paper lost value rapidly, the state was forced to issue more paper to meet its obligations, and the system collapsed within a few decades. The late Ming had effectively abandoned paper money by the late fifteenth and sixteenth centuries, and the chronic coin shortage that resulted lasted into the early Qing.

The Silver Age and the Single-Whip Reform

The single most important monetary fact of the late imperial period was the rise of silver. The late Ming single-whip reform of the 1580s and 1590s, generally attributed to the Grand Secretary Zhang Juzheng, converted most tax obligations to silver, which made the Ming state dependent on imported silver. The source of that silver was the Spanish Empire in the Americas: the silver mines of Potosí in Bolivia and, to a lesser extent, Mexico. Spanish silver crossed the Pacific to Manila, was carried by Chinese merchants to Fujian, and was then distributed across the empire in exchange for silk, porcelain, and tea.

The silver-based system worked well for a time. The volume of silver imports in the late Ming and early Qing was the largest such flow in the preindustrial world. The Kangxi and Yongzheng emperors restored the coin supply, and the Qianlong emperor presided over a period of relative monetary stability. The early nineteenth century, however, saw a reversal of the silver flow as the opium trade drained silver from the Chinese economy, and the resulting deflation and fiscal crisis contributed to the broader collapse of the imperial order. The history of the fall of imperial China takes up the nineteenth-century crisis in detail.

The Lessons of the Chinese Paper Money Experiments

The Chinese experiments with paper money offer a remarkable case study in the possibilities and the limits of state-issued paper currency. The Song experiments demonstrated that paper money could work, under conditions of fiscal restraint, sound backing, and public confidence. The Yuan demonstrated that paper money could be issued on a national scale, but also that a state unable or unwilling to limit the supply would produce hyperinflation. The early Ming demonstrated that the memory of hyperinflation could not be overcome by simple decree. The late Ming demonstrated that a metallic-based system, especially a silver-based system, was more sustainable, although it had its own vulnerabilities to the global silver supply. Marco Polo, returning from Yuan China, brought back detailed accounts of paper money that influenced European thinking about currency. The world history of money, in short, begins in Song Sichuan.