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

Gary North
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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.


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:


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

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