Gary North on current economic affairs and investment marketsGary North -- Specific Answers
HomeContact MeTell a FriendText SizeSearchMember Area
Gain immediate access to all of our current articles, the question-and-answer forums, dozens of free books, and article archives. Click here for details on how to join.

About This Site
Academic Gaps
Articles
Capitalism and the Bible
Clichés of Protectionism
College Finances
Debt Management
Ellen Brown: Critique
Federal Reserve Charts
Gary North's Free Books
Get Published Here!
Gold Price & My Report
Keynes Project
Price Index (U.S.A.)
Questions for Jim Wallis
Remnant Review
Social Security/Medicare
Sustained Revival
Tea Party Economist
U.S. Debt Clock
Yield Curve
Your YouTube Channel
Gary North's Miscellany
Advertising
Blogging
Budgeting for Wealth
Business Start-Up
Career Advancement
Digital Tools
Education That Works
Evernote: Free Notes
Federal Reserve Policy
Fireproof Your Job
Goal-Setting for Success
Great Default
Inheritance Strategies
Insurance
International Investing
Investment Basics
Job and Calling
Keynesian Economics
Leadership
Marketing Case Studies
Obamanomics
Precious Metals
Real Estate
Retirement
Safe Places
State of the Economy
Stocks and Bonds
Study Habits
Video Channel Profits
War With Iran
Members' Free Manuals
Our Products
Contact Me
Help
Tell a Friend
Text Size
Your Account
My 100% Guarantee
Privacy Policy
Terms of Use


This site powered by MemberGate

Historical Error #9: China's Medieval Fiat Paper Money Had Centuries of Success.

Gary North
Printer-Friendly Format

Ellen Brown praises fiat money. She then praises medieval China for its success with fiat paper money.

Meanwhile, England was faced with the problem of what to use for money when the country was short of gold. The coinage system was commodity-based. It assumed that "money" was something having value in itself (gold or silver), which was bartered or traded for goods or services of equal value. But according to Stephen Zarlenga, who has traced the origins and history of money in his revealing compendium The Lost Science of Money, the use of coins as money did not originate with merchants trading in the marketplace. The first known coins were issued by governments; and their value was the value stamped on them, not the price at which the metal traded. Zarlenga quotes Aristotle, who said:

Money exists not by nature but by law. [It acts] as a measure [that] makes goods commensurate and equates them. . . . There must then be a unit, and that fixed by agreement.

Money was a mere fiat of the law. Fiat means "let it be done" in Latin. "Fiat money" is money that is legal tender by government decree. It is simply a "tally," something representing units of value that can be traded in the market, a receipt for goods or services that can legally be tendered for other goods or services. In Mandarin China, where paper money was invented in the ninth century, this sort of fiat currency funded a long and prosperous empire. [Web of Debt, pp. 60-61]

Stephen Zarlenga is a non-economist who wrote a book that promotes fiat paper money. He has his opinion. I have mine. I think he is wrong. So what?

Here is what can be verified. A reliable source on the history of Chinese paper money is a book by Ralph T. Foster, Fiat Paper Money: The History and Evolution of Our Currency. He devotes Chapter 2 to Chinese money.

First, the money in question was not originally fiat money. It was backed by coins.

Second, when the government removed the coin backing to make the paper money a pure fiat currency, there was mass inflation, beginning in the Sung Dynasty (960). After the Mongols conquered China in the 13th century, they also started printing fiat money. The result was hyperinflation.

Here is the evidence, which anyone could find in 15 minutes on Google by searching for China, money, and medieval.

Paper currency was a by-product of Chinese block-printing. It started in Tang but not until Song dynasty that it became institutionalized as a governmental policy. It had two main advantages over money made out of silver, gold, copper or iron: It was easier to carry around and the copper and iron could be saved for use in everyday objects. Names and seals were printed and written on paper money by the government officials who issued it. Unfortunately no written documents exist today which enable us to know how this system of paper currency actually functioned prior to the Yuan period. When Marco Polo traveled to China in the 13th century, he was so impressed by paper money that he described how it was made, used and valued. Paper money was not used in Europe until the 17th century.

Paper money began with the "flying cash" of the Tang (618-907) dynasty around 800. The Tang government considering the inconvenience of shipping cash to distant areas where government purchases were made, paid local merchants with money certificates called "flying cash", because of its tendency to blow away. These certificates bearing different amounts of money could be converted into hard cash on demand at the capital. Since they were transferable, they were exchanged among merchants almost like currency.

"Flying cash" was not meant to be currency and its circulation was rather limited. Real paper currency was not introduced until early in the Song (960-1279) dynasty, when it was utilized by a group of rich merchants and financiers in Szechuan, the same province where the art of printing had been invented. Each banknote they issued had printed on it pictures of houses, trees, and people. Red and black inks were intermittently applied; the seals of the issuing banks were affixed; and confidential marks were made on each bill. All these devices made counterfeiting extremely difficult. These banknotes could be converted into hard cash at any time in any of the issuing banks. Widely circulated, they were readily accepted for the payment in debt and other financial obligations. In 1023 these banknotes were withdrawn and only official notes printed by the government were allowed. This new adopted governmental policy was successful at first for two reasons: First, for each issue of paper notes to be put into circulation, the government provided a cash backing. Second, paper notes and standard coins were interchangeable. Moreover, a citizen could buy salt or liquor with his paper notes from the government-owned stores. In short, paper notes were as good as coined money.

After Chin (1115-1234) occupied the north China, it followed Song's practice. In 1154 it established a Bureau of Paper Currency in Kaifeng as the central agency in charge of all issues. Two kinds paper currency were issued, one of large denominations, consisting of one to ten strings (each string was worth 1000 standard coins) and another of small denominations, bearing the amounts of one to seven hundred standard coins. The validity of each issue was limited to seven years. However little thought was given to backing the currency issue and inflation soared during the 12th century. Even though counterfeiter of paper currency was punishable by death, there were few attempts. In 1183, a printer, who had produced 2600 fake notes in 6 months was arrested and sentenced to death.

Soon after the Mongol took over China and established Yuan (1264-1368) dynasty, it followed the example of its predecessors, Tang, Song and Chin, in using paper currency. The first paper currency issued in Yuan dynasty was in 1260. Various denominations were printed, ranging from a face value of two standard coins to the highest denomination of two strings. Excessive printing year after year soon flooded the market with depreciated paper money until the face value of each certificate bore no relation whatsoever to its counterpart in silver. In 1272 a series of new issues was put in circulation and the old issues were converted into the new ones at the ratio of five to one. The new issues were printed with copper plates instead of wood blocks, as had been the case before. In 1309 another conversion became necessary. In fifty years from 1260 to 1309 Yuan's paper money was depreciated by 1000 percent. To make the situation worse, the government often refused to exchange for new issues old certificates that had been worn out through a long period of circulation.

http://www.silk-road.com/artl/papermoney.shtml

Want more evidence? There is more. This is from Wikipedia.

During the early Song dynasty (Chinese: ?, 960--1279), China again reunited the currency system displacing coinages from ten or so independent states. Among pre-Song coins, the northern states tended to prefer copper coins. The southern states tended to use lead or iron coins with Sichuan using its own heavy iron coins which continued to circulate for a short period into the Song dynasty. By 1000, unification was complete and China experienced a rapid period of economic growth. This was reflected in the growth of coining. In 1073, the peak year for minting coins in the Northern Song, the government produced an estimated six million strings containing a thousand copper coins each. The Northern Song is thought to have minted over two hundred million strings of coins which were often exported to Inner Asia, Japan, and South-East Asia, where they often formed the dominant form of coinage. Song merchants rapidly adopted forms of paper currency starting with promissory notes in Sichuan called "flying money" (feiqian). These proved so useful the state took over production of this form of paper money with the first state-backed printing in 1024. By the 12th century, various forms of paper money had become the dominant forms of currency in China and were known by a variety of names such as jiaozi, qianyin, kuaizi, or guanzi.

The Mongol-founded Yuan dynasty (Chinese: ?, 1271--1368) also attempted to use paper currency. Unlike the Song dynasty, they created a unified, national system that was not backed by silver or gold. The currency issued by the Yuan was the world's first fiat currency, known as Chao. The Yuan government attempted to prohibit all transactions in or possession of silver or gold, which had to be turned over to the government. Inflation in 1260 caused the government to replace the existing paper currency with a new paper currency in 1287, but inflation caused by undisciplined printing remained a problem for the Yuan court until the end of the Dynasty.

In short, lawyer Brown has once again misled her readers. She made up a history that never existed.

Her reply is here:

http://www.garynorth.com/public/7149.cfm

For a detailed critique of Ellen Brown's economics, go here:

http://www.garynorth.com/public/department141.cfm


Printer-Friendly Format
 Tip of the Week
Sign up for my free
Tip of the Week
Verification Characters:    Type     3  M  1  Z  8     here   


Tip of the week archives
On what this icon
means, and how it
can help you,
click here
 Q & A Forums
General Q&A Forum
Advertising and Resumés
Affiliates
American History Topics
Backyard Food Gardening
Banking and Politics
Blog Sites and Web Sites
Books Worth Reading
Bumper Sticker Slogans
Business Forum
Buying Smart
Christian Service Forum
College -- The Cheap Way
Copywriting
Education Alternatives
Food Storage
For Women Only
Fukushima
GNC Benefits
GNC Testimonials
Gold and Silver
Great Default Forum
Health and Diet
Health Insurance
Homeschooling
Investments Forum
Iran War
Job, Calling, and Career
Leadership Development
Legacy Building
Less Dependent Living
Local Political Action
Non-Retirement Forum
One Good Idea
Police State
Privacy
Public Speaking
Real Estate Forum
Remnant Review Forum
Safe Places Forum
Taxation Policy
Typographical Errors
Video Production Basics

 Archives
Reality Check
 Discussion Forum
Search Discussion


Recent Forum Posts
• How do you invest in this system.
• Retirement Fund: Advertising budget
• Kotlikoff says SIPC insurance is a fraud
• How to Evaluate A Country's Economic Condition
• Eugene Fama's Dimension Funds
• Financial Management Sites
• Don't Touch Principle Follow Up
• FOREX (I use OANDA.com) - trading ideas -
• Funding Retirement vs. Paying Off Mortgage
• Timing Canadian dollar purchase
• Investing in specific stocks
• Investing in Christian Businesses
• Asset seizure risk
• 403B Sidelines
• Ammo hoarding
• Housing Costs
• I inherited a house in SF CA, rent it or sell it?
• Any advice on how to deal with city council
• RE investment dinner and seminar
• Goodbye California, Hello Texas
• Would you consider selling using an auction?
• First debt free rental done
• Plaster wall repair and paint
• No-recourse loan in an IRA
• Buying duplex for my 72 yo sis to run from afar
• Depreciation versus maintenance expenses
• lease to own
• Real Estate Wholesaling - Direct Marketing
• Selling a house without a real estate agent
• Inspection before listing house
• No City for Old People
• Will you die getting to your bug out location?
• teaching English overseas - some questions
• The state with the most Liberty
• Switzerland and Firearms
• On "Zip Code Searching On The Web"
• Crash Course in becoming an Expat
• Anyone tried Puerto Rico?
• Chattanooga, Tennessee
• Middle Class squeezed out of Chicago
• An Article on Chile
• 5 Amazing, Cheap Places to Live as an Expat
• Oil Field Job Security
• Moving to TriCities Area
• PJ ORourke on the Baby Boom
• advice on how do I interact with my older parents?
• Do You Sincerely Want to Be Rich? Why?
• Req. For No 401(k)/Other Pensions via Relocatio
• Cashing out 401K to pay student debt?
• SS @ 62 and still working
• Desolation or Prosperity?
• I take it Retirement Armageddon is not available
• Post Retirement Career
• Social Security - when to start collecting
• 401K Risk
• Detroit Retirees Fight 83% Health Care Cut
• Lump Sum Early DROP
• Underfunded pensions
• 401k strategy
• Can I Avoid Medicare Entirely?
• Assessing the seeds of moral weakness
• Kremlin Dramatically Changes Rules Of Doing Busine
• Vote fraud in Scotland election?
• advice for a young father
• Consider Canadian drugstores4 cheaper prescription
• Why so many Americans would consider Seceding?
• A generation of sissies
• Opinions please
• Gold & Silver IRA ~ YOU Hold the Metal
• The Economic Recovery as Seen from the Air
• The Code
• Which Global Hegemon Is on Shifting Sands?
• Illustration of Ill Lustration
• Cataract surgery in India
• Class of 1964 in Rural Virginia
• Good Marketing Book
• Day Care in Cary
• RE: If This Is Your Boss
• Entrepreneuring in a socialist nation
• Undoing the Walmart model?
• Quickbooks Alternatives for Small Family Business
• Make a few bucks selling books
• Retail vs Online - a personal experience
• freeman workbook on entrepreneurism
• Selling ad space in my newsletter
• Angel's Game
• aweber list and marketing
• Paid counseling web site
• Wife's small business - Spanish Immersion 4 chldr
• Alternative to Quicken 2014 needed