How China Invented Modern Money and Sparked an Economic Revolution
- didiermoretti
- May 6
- 7 min read
Picture a medieval European, clutching a sack of coins, being told that a scrap of paper—backed by nothing but a promise—could buy a week’s groceries. They’d likely scoff, then suggest a priest for your troubled soul. Yet, eight centuries before modern central banks, China was already running humanity’s first grand experiment with paper money. While Europeans bartered chickens and lugged metal coins, Song and Yuan dynasty merchants traded with what was, in essence, the world’s first fiat currency. (1)
This wasn’t just a quirky footnote; it sparked a market revolution 800 years before Europe’s Industrial Age—only for China to squander this monumental lead, a historical head-scratcher akin to inventing the internet and then reverting to smoke signals. What happened?
From Trees to Treasure: The Paper Trail
The journey from mulberry bark to monetary system began with China's invention of paper. Traditionally credited to court official Cai Lun around 105 CE (though archaeological evidence hints at earlier, more rudimentary forms), paper offered a revolutionary medium for record-keeping and communication. Cai Lun's significant improvements yielded a superior, more affordable writing material than silk or bamboo – a technological leap so profound his name became synonymous with the product: "Cai Hou paper."
Printing followed a few hundred years later, driven partly by Buddhism's emphasis on reproducing sacred texts. Picture a monk, surely driven to the brink by repetitive transcription of the same text for the thousandth time, having the epiphany to carve the text into a wood block, cover it with ink, and stamp it onto paper. The earliest surviving printed text—a Buddhist prayer scroll from around 868 CE (2)—represents the beginning of a technological revolution that would eventually transform human knowledge transmission more fundamentally than anything since the invention of writing itself.
These twin innovations—paper and printing—set the stage for another world-changing invention: paper money.
From Necessity to Innovation: The Birth of Paper Currency
The story of paper currency starts in Sichuan around 995 CE, where necessity birthed ingenuity. (3) While most of China used bronze coins, Sichuan relied on iron—cheap but absurdly heavy. Buying a pound of salt meant hauling a pound and a half of coins, a logistical nightmare akin to paying for groceries with only pennies. Enter a savvy Chengdu merchant who issued standardized paper receipts for deposited coins. These receipts, lighter than a feather, became money itself as people traded them directly. When shady merchants inevitably exploited the system, the government stepped in, nationalizing the operation and printing official notes.
Paper money solved a fundamental problem of metallic money: its clunkiness and unwieldiness for large transactions. Try paying your taxes with a cartload of bronze coins, and you'll quickly appreciate why paper money was transformative. The government, too, found advantages in this system, shifting from collecting taxes in cloth and grain to accepting coins and paper—a change that liberated people from prescribed economic activities like weaving and farming merely to satisfy tax obligations. Suddenly, citizens had more freedom to choose their vocations based on their capabilities rather than the government's collection preferences.
Economic Revolution: Markets, Cities, and Goose with Apricots
By the 11th century, paper money, alongside movable type, the compass, and better rice yields, fueled a market economy that left feudal tribute systems in the dust. Farmers grew mulberry for silkworms or paper, others raised fish in specialized hatcheries, and entrepreneurs shipped fry hundreds of miles to ideal ponds. Markets, once confined to tightly controlled zones where rule-breakers risked burial alive, now flourished freely. The market economy was replacing the command economy, with remarkable results.
Cities like Hangzhou swelled past a million residents—dwarfing London’s 100,000—boasting a vibrant restaurant scene, with noodle joints, spicy Szechuan dives, and upscale eateries serving goose with apricots. Medieval hipster foodies, it seems, were as insufferable as today’s.
This wasn’t just urban buzz; it was growth, a rare escape from humanity’s default state of economic stasis. People were getting richer—not just a few elites, but broad segments of society. The money-driven growth of markets accompanied technological breakthroughs, resulting in increased purchasing power for a day's work. This represents the fundamental economic miracle: sustainable elevation of living standards through productivity growth. By 1200, China was likely the world's richest civilization and certainly its most technologically advanced.
The Mongol Monetary Experiment: Kublai Khan's Fiat Adventure
When Genghis Khan's army captured Beijing in 1215, and his grandson Kublai became Great Khan forty-five years later, the Mongols confronted the challenge of managing the world's largest empire. (4) As nomads obsessed with speed and mobility, they found paper money far more practical than cumbersome coins (imagine the logistical nightmare of a Mongol horde lugging around sacks of bronze). Kublai recognized this opportunity and created a new type of paper money intended for use across vast regions.
His innovation was a blunt diktat: his currency was declared the only acceptable medium of exchange. Counterfeiters faced death; whistleblowers, rewards. The state issued small denominations to eradicate bronze coins, and Kublai banned gold and silver in trade, ensuring his paper had no rivals. This was no longer money as a convenience – it was money by command.
From 1280 to 1350, however, the state succumbed to bouts of inflation. The trouble began with annexing the Southern Song territories, whose population of 60 million dwarfed Kublai's initial power base. The temptation to finance ambitious projects, like the repeatedly ill-fated invasions of Japan, through currency expansion proved irresistible. After all, Japan sat tantalizingly across a narrow sea, practically begging for a demonstration of Mongol might, conveniently payable with freshly printed paper.
The Temptation of the Printing Press
In 1287, following two failed invasions of Japan, Kublai took a revolutionary step: he issued the zhiyuan chao, a new currency valued at five times the old one – effectively attempting to devalue the old money into oblivion. Though it still displayed pictures of bronze coins, these were purely ornamental. Government offices refused to redeem the paper for silver or bronze; people could no longer exchange their "treasure vouchers" for actual treasure.
Until this point, paper money had been theoretically backed by metal—what economists call "soft money," meaning it was nominally redeemable even if, in practice, it often wasn't. Kublai's new currency severed that final thread: declared inconvertible to hard money, it became true fiat currency—valuable not because of what it could be exchanged for, but because the state said so. This is the radical experiment that Marco Polo witnessed: money as almost pure abstraction. It was as if Wile E. Coyote ran off a cliff, looked down, saw empty space below—and somehow didn't fall.
Panic likely ensued, followed by inflation as money lost value. Yet remarkably, the economy eventually stabilized. The center held. Paper that was just paper—no longer even pretending to represent metal—still functioned as money. Partly this success stemmed from the Mongol state's raw power: use this paper as money or face dire consequences. But after three centuries of paper money use, Chinese society had internalized a profound truth: paper money worked not because it was backed by precious metal, but because everyone agreed it could be money. This shared fiction is the foundation of all modern monetary systems. In a historical echo that resonates with our own era of digital currencies and cryptocurrencies, Kublai's fiat experiment underscored a fundamental truth: value derives not from tangible assets but from collective belief – and, let's not forget, the occasional persuasive power of the state.
With mounting budget deficits and recurring inflation, people eventually lost faith in Kublai's currencies. His successors experimented with new currencies but couldn't restore confidence. By 1311, a dual monetary system returned, eventually standardizing on currency supposedly convertible to silver. This restored system fostered relative economic calm until the Yuan Dynasty's power eroded mid-century. (5)
The Great Regression: How China Abandoned Its Own Innovations
China experienced its own economic revolution eight centuries before England's. While Chinese economic growth didn't match the explosive trajectory of later European development, Chinese inventions from that era—paper, printing, the magnetic compass—proved essential for Europe's subsequent advancement. This raises a puzzling question: What happened to China? The civilization at the cutting edge of economic sophistication and technology in 1300 had fallen far behind by 1900. Why?
The man who became known as the Hongwu emperor began life as a destitute farmer's child, orphaned by sixteen. He entered a Buddhist monastery to avoid starvation, joined anti-Mongol rebels, and fought his way up the ranks. After driving the Mongols north of the Great Wall in 1368, Hongwu founded the Ming Dynasty, which would endure for nearly three centuries.
Hongwu harbored a profound distaste for money and markets, yearning to return China to an idealized past – not just pre-Mongol, but pre-economic revolution. He envisioned a nation of self-sufficient agricultural villages where people grew and shared what they needed. Consequently, he and his successors systematically dismantled the economic changes that had driven China's prosperity.
By the mid-1400s, paper money had vanished entirely from China. People reverted to silver lumps, copper coins, or often no money at all. The emperor had succeeded in dragging China backward, and the average Chinese person was poorer than their ancestors two centuries earlier. The economic revolution sparked by paper money became largely forgotten history.
The Lessons of Paper Promises
China’s paper money saga, spanning the three hundred years to 1400, was no blip—it lasted as long as our current age of fiat currencies. It showed that abstract money, backed by trust rather than gold, could transform societies, fostering markets, cities, and wealth. Yet, it also exposed money’s fragility. Overprinting sparked inflation, and ideological backlash erased gains. The Chinese, who pioneered paper, printing, and fiat, fell behind Europe by 1900, partly because a lack of competitive pressure and leaders like Hongwu who stifled their own revolution.
As we navigate our own era of monetary experimentation—from quantitative easing to digital currencies—China's paper money saga reminds us that even the most brilliant financial innovations are ultimately fragile, susceptible to the perennial human failings of mismanagement, inflation, and ideological stubbornness. Money is a social technology built on collective trust. When that trust erodes, even the grandest financial systems crumble—like a palace of paper, whispering promises no one believes. A lesson, perhaps, that bears repeating.
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(1) This article borrows liberally from Money: The True Story of a Made-Up Thing by Jacob Goldstein, The History of Money by Jack Weatherford, Coined: The Rich Life of Money and How its History Shaped Us by Kabir Shegal, and The Ascent of Money by Niall Ferguson.
(2) The Diamond Sutra, dated 868 CE, from the Dunhuang cave library (British Library OR.8210/P.2).
(3) Note that while the Song institutionalized paper money, the Tang Dynasty’s feiqian (飛錢, "flying cash") certificates, used for tax payments and long-distance trade, emerged c. 800 CE. These were not general-use banknotes but precursors to formal paper currency.
(4) See Genghis Khan and the Making of the Modern World, by Jack Weatherford
(5) While Kublai’s fiat system initially stabilized, his successors’ excessive money printing to fund wars and court expenses led to hyperinflation. By the 1350s, paper notes lost nearly all value, contributing to the Yuan Dynasty’s collapse.
