EARLY CHINESE TRADERS’ EXPERIMENTS WITH VARIOUS MATERIAL CURRENCIES

Endless books have been written about the dangers of governments printing too much money. But for centuries the opposite problem was just as common: governments often couldn’t mint enough coins (or the right coins) to meet their subjects’ needs. When currency famine struck one of the most dynamic pre-modern economies—that of Tang (645–907) and Song (960–1127) China—it spawned innovations that ranged from coins made of lead and pottery on the one hand, to the world’s first paper money on the other. And, surprisingly, the awkward coins survived longer than the modern-sounding paper money. Therein lurks a surprising lesson: a single convenient currency isn’t always what a complex economy needs.

The basic problem was simple: “medieval” China’s economy was growing and commercializing too fast for both its political institutions and its metal supply. The Chinese had used copper, bronze and (more rarely) gold coins for centuries, but the dizzying speed of economic change meant that too many exchanges were happening for the supply of coins. The 11th century alone saw a twentyfold increase in the annual output of government mints, plus lots of private coinage—and it still wasn’t enough. Lead and iron coins were used locally where those metals were plentiful, despite their inconvenience; and silk, tea and other luxury commodities were regularly used as “money” for large transactions. Then, to avoid the costs and hazards of transporting commodity “money,” both tax collectors and long-distance traders began printing commodity-based notes: thus somebody delivering, say, salt to Hangzhou could receive not silk or copper to take home, but a piece of paper that could be exchanged for silk or copper once he got home. Then the government—concerned about the confusion, fraud and high transaction costs created by the wide variety of moneys—began issuing more notes of its own, making them exchangeable for any commodity and insisting that merchants use those notes instead of printing others. By 1024—centuries before anything comparable in the West—we find Chinese governments printing recognizable paper money.

Just one more step—issuing standard notes in small denominations to replace most of the varied mass of coins—would have created the kind of currency system we’re used to. So why didn’t this happen?

The problem was that “money” had at least three distinct functions in this period, which often clashed. It was the way of settling accounts for large long-distance transactions: forwarding taxes from the provinces to the capital, provisioning armies, and buying rare luxuries. It was the essential lubricant for the millions of small daily transactions in a society far more market-driven than the Europe of its day. And, as something that the Chinese made more skillfully than others in East and Southeast Asia (who trailed in both printing and minting technology), it was an export good in high demand.

Paper money was ideal for large-scale domestic trade and made

considerable headway against coins of all sorts. High-quality copper (and some gold) coins were good to export, since foreigners could test their reliability more easily than paper, and remint them if they chose. As a result, paper, gold and copper shared a tendency to disappear from local circulation—especially in areas that imported necessities (such as salt) from elsewhere in China, or had trouble meeting their tax bills. Those areas suffered frequent liquidity crises and adjusted by minting whatever was at hand. In fact, for such areas, very awkward currencies—lead, iron, pottery—were actually ideal; since it would not be very profitable to carry such bulky currencies away, it was better for merchants who sold in these markets to take home commodities. Thus “junk money” not only ensured that there would be some money around to fuel local circuits of exchange in poor areas; it also provided a hidden subsidy to the “exports” those areas needed to balance their “imports.” (In areas that exported necessities like salt, “bad” money was not needed and seems to have been much less common.) So while one reformer after another sought to curb these local moneys, it was no accident that none ever succeeded—and it would have been disastrous if they had. Instead, sophisticated markets developed in which local currencies could be exchanged for more standard moneys, but only in limited quantities—a solution that balanced the needs of a huge interdependent economy with the “protectionist” needs of poorer localities.

And in the long run, paper money proved more vulnerable than clumsy coins. Since paper was supposed to be trustworthy enough to circulate over huge distances, periodic printing press inflation compromised its usefulness much more than overminting damaged local currencies. And as the currency designed for large, long-distance transactions, paper money became far less useful when political disruptions—particularly the wars that accompanied the collapse of Mongol rule in the mid-1300s—obstructed long-distance trade. Long-distance trade recovered and then reached new heights in the 1500s, but by then a new medium of exchange was available: silver, which came first from Japan, Vietnam and Burma, and then, in unprecedented amounts, from the New World. For the next 300 years, close to half the world’s silver production found its way into China’s money supply, joining but not replacing other local coins, while becoming the standard for long-distance trade. Meanwhile the rest of the world enjoyed silks, porcelain and other goodies they could not have purchased had China’s experiment with paper money not proved abortive.

Only after the 19th century opium trade reversed this silver inflow did the Chinese government return to printing paper money. And as poorer areas once again found silver and copper scarce, bronze, iron and other local coins again proliferated, much to the dismay of foreigners. But what Westerners thought was monetary chaos permitted by a government that had never cared enough about trade to create a reliable currency was really something very different: the return of mechanisms that mediated the many levels of a complex economy in a way that no one currency could do.