How China Accelerated the Development of Paper Banknotes (#111 - 2 July 2022)



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The Future of Money with Henri Arslanian
How China Accelerated the Development of Paper Banknotes (#111 - 2 July 2022)
By Henri Arslanian • Issue #100 • View online
We often talk about the role China is now playing in the development of its CBDC, the e-CNY. But did you know that China contributed greatly to the rise of paper banknotes? And that had a major impact on the development of trade and banking.
I cover it all in this latest issue of your newsletter.
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In order to understand the latest iteration of money and commerce, it is very much worthwhile to gaze all the way back through human history and focus on some of the primitive forms of money that laid the foundation for everything to come.
We’ve already touched upon the role that salthumansfurcattle, and cowrie have played in the development of money and trade, not to mention the Lydians, the Greeks, the Knights Templar, and Renaissance-era Italian bankers.
Now let’s turn our attention to the Chinese and the impact they made in shaping modern finance as we know it today!
From the 11th to the 14th century, the city of Quanzhou (in today’s Fujian province, across from Taiwan) served as China’s principal fort for foreign traders.
As Jame DiBiasio writes in his latest book, Quanzhou was a giant and cosmopolitan city home to Buddhist, Muslim, Christian, and Hindu communities.
At that time, China was under Mongolian control following a series of invasions that began with Genghis Khan and which were completed by his grandson, Kublai Khan.
In 1271, Kublai Khan declared that he had a mandate from heaven to launch a Chinese dynasty, the Yuan. He then proceeded to set in motion several initiatives, including the issuance of paper money. 
The celebrated Marco Polo, who journeyed around Asia from 1271 to 1295, said that with regards to the money of Khanbalik (as Beijing was called back then), “the great Khan may be called the perfect alchemist, for he makes it himself.”
Marco Polo described how the Chinese manufactured paper notes (or “cards” as he called them) from the bark of the mulberry tree.
As he wrote in his Travels, “All these cards are stamped with the khan’s seal, and so many are fabricated that they would buy all the treasuries in the world. He makes all his payments in them and circulates them throughout his kingdoms and provinces over which he holds dominion, and none dares to refuse them under pain of death.”
In 1287, Kublai Khan issued a paper note called the zhiyuan chao, which was the first note that was not nominally linked to silver or any other metal. Rather, its value was based on the mightiness of the emperor. 
Yuan dynasty banknote with its printing plate (1287) Source: Creative Commons
Yuan dynasty banknote with its printing plate (1287) Source: Creative Commons
One advantage, according to Di Biasio, was that the Chinese emperor had was de facto complete control. The Khan confiscated all gold and silver coins to ensure his paper currency was accepted and when entering China, foreign merchants were required to hand over their bullion for paper notes at rates determined by Chinese moneychangers.
Their bullion was held on deposit until they left the country. The Khan was able to issue his paper currency and have people accept it, as he had a powerful state, an effective bureaucracy, and a cowed justice system.
(These historical developments parallel some of the conditions that have allowed 21st century China to issue its own central bank digital currency (CBDC) and have everyone accept it.) 
However, by 1350, China’s experiment with paper money had collapsed; the emperors (in a pattern that we’ve seen throughout the history of money) had printed way too much (quantitative easing is not a new phenomenon), triggering rampant inflation, leading the ethnic Han Chinese to kick out their Mongolian overlords and establish the Ming dynasty.
While the Ming dynasty was initially ambitious when it came to its global outlook (the epic voyages of Admiral Zheng He from 1405 to 1425 are a great example), the Ming quickly retrenched and closed themselves off from the outside world. Chinese society gradually lost its culture of innovation.
After moving to a more isolationist stance, the Chinese emperors were initially careful with paper issuance before (once again) turning on the printing presses. 
By the 16th century, the Ming had lost control of their currency, and China was suffering from hyperinflation, forcing the emperor in 1567 to re-allow foreign trade at China’s borders.
This became particularly interesting for the emperor when he found these foreigners had lots of silver, something he lacked and desperately needed to finance his armies.
The Chinese had the goods the Europeans loved like silk and porcelain, but China had no reciprocal interest in European goods.
However, China needed silver and the Europeans (especially the Spanish) had lots of it. This would transform global trade. 
But that’s a story for another time!
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Henri Arslanian
*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind. 
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Henri Arslanian

Future of Finance and Money - PwC Global Crypto Leader, Best Selling Author, Keynote Speaker, University Professor, Host of Crypto Capsule™ - Views are my own

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