Tales of Soft Money — Kublai’s Alchemy


While in China, 14th century traveler Ibn Battuta also documented a practice very rare at that time: the use of paper-money:

The Chinese use neither [gold] dinars nor [silver] dirhams in their commerce. All the gold and silver that comes into their country is cast by them into ingots, as we have described. Their buying and selling is carried on exclusively by means of pieces of paper, each of the size of the palm of the hand, and stamped with the sultan's seal. Twenty-five of these pieces of paper are called a balisht, which takes the place of the dinar with us [as the unit of currency] [1].

Similar observations had been made half a century earlier, by Venetian explorer Marco Polo. The story of Marco Polo did not start with him, but with his father Nicolas and his uncle Maffeo who both were responsible for setting Marco on a path of travels and explorations. He ultimately reached Kublai Khan's vast Mongol empire. We know of these tales due to Marco Polo sharing a cell with a certain Rustichello da Pisa in a Genovese prison during a war between the two merchant republics. Rustichello, already experienced in the craft of writing, listened carefully to Polo's accounts of the East, and subsequently published those stories later. As the printing press had not been discovered in Europe by this time, the large number of translations of Rustichello's works differ greatly in quality and content. But today, we can be fairly confident that most of the later translations contain a good bit of truthful and useful information  -  something that modern translators have verified with the help of independent Chinese documents as well as archaeological findings.

Henry Yule published an 1871 English edition of Polo's travels, with additional notes and comments that have been very helpful in understanding a broader context of what Polo described. Fantastic tales aside, the translated parts important to this article were those of the Khan's paper money:

Now that I have told you in detail of the splendour of this City of the Emperor's, I shall proceed to tell you of the Mint which he hath in the same city, in the which he hath his money coined and struck, as I shall relate to you. And in doing so I shall make manifest to you how it is that the Great Lord may well be able to accomplish even much more than I have told you, or am going to tell you, in this Book. For, tell it how I might, you never would be satisfied that I was keeping within truth and reason!

The Emperor's Mint then is in this same City of Cambaluc, and the way it is wrought is such that you might say he hath the Secret of Alchemy in perfection, and you would be right! For he makes his money after this fashion.

He makes them take of the bark of a certain tree, in fact of the Mulberry Tree, the leaves of which are the food of the silkworms - these trees being so numerous that whole districts are full of them. [2]

Polo, described by translators as radiating little or no humor or emotion in his recounting, clearly was astonished by the fact that Kublai Khan printed money 'from nothing'. Yule, as he translated Rustichello's notes, even found it worth commenting on this fact:

Of humour there are hardly any signs in his Book. His almost solitary joke [...] occurs in speaking of the Kaan's paper-money, when he observes that Kublai might be said to have the true Philosopher's Stone, for he made his money at pleasure [...]. [3]

Yule, being much more skeptical than the good Polo in this case, decided to include critical comments on the issue of Chinese paper money:

The issue of paper-money in China is at least as old as the beginning of the 9th century. In 1160 the system had gone to such excess that government paper equivalent in nominal value to 43,600,000 ounces of silver had been issued in six years, and there were local notes besides; so that the Empire was flooded with rapidly depreciating paper. The Kin or " Golden" Dynasty of Northern Invaders who immediately preceded the Mongols took to paper, in spite of their title, as kindly as the native sovereigns. Their notes had a course of seven years, after which new notes were issued to the holders, with a deduction of 15 per cent. [...]

The Mongols commenced their issues of paper-money in 1236, long before they had transferred the seat of their government to China. Kublai made such an issue in the first year of his reign (1260), and continued to issue notes copiously till the end. In 1287 he put out a complete new currency, one note of which was to exchange against five of the previous series of equal nominal value! In both issues the paper-money was, in official valuation, only equivalent to half its nominal value in silver. The paper-money was called Chao. [4]

It appears that Polo's marvels at the phenomenon of paper money were slightly premature, albeit understandable. It probably didn't occur to him to fully appreciate the danger of forced dilution or of fractional reserve banking. The Khan's money, easy as it was, could be mass produced to the detriment of all its holders. Yule continues:

To complete the history of the Chinese paper-currency so far as we can: In 1309, a new issue took place with the same provision as in Kublai's last issue, i.e. each note of the new issue was to exchange against 5 of the last of the same nominal value. And it was at the same time prescribed that the notes should exchange at par with metals, which of course it was beyond the power of Government to enforce, and so the notes were abandoned. Issues continued from time to time to the end of the Mongol Dynasty. The paper-currency is spoken of by Odoric (1320-30), by Pegolotti (1330-40), and by Ibn Batuta (1348), as still the chief, if not sole, currency of the Empire. According to the Chinese authorities, the credit of these issues was constantly diminishing, as 'tis easy to suppose. But it is odd that all the Western Travellers speak as if the notes were as good as gold. Pegolotti, writing for mercantile men, and from the information (as we may suppose) of mercantile men, says explicitly that there was no depreciation. [...] [5]

This is strange indeed. Marco Polo's stories also corroborate Battuta's claim that notes were readily taken by merchants. The fact that not accepting them could result in capital punishment was of course something for merchants to consider. Yule also mentions that the 14th century Ming dynasty made use of paper money as well, but that it only paid with those notes, while demanding payments in 'hard cash', which likely meant silver or gold. In 1448 the Chao of 1000 cash, according to Yule, was worth only 3, and the paper-money system fell in disuse.

Yule ends the explanatory note on Chinese paper money by mentioning, at that time, current developments on the subject:

Some fifteen years ago [from 1871] the Imperial Government seems to have been induced by the exhausted state of the Treasury, and these large examples of the local use of paper-currency, to consider projects for resuming that system after the disuse of four centuries. A curious report by a committee of the Imperial Supreme Council, on a project for such a currency, appears among the papers published by the Russian Mission at Peking. It is unfavourable to the particular project, but we gather from other sources that the Government not long afterwards did open banks in the large cities of the Empire for the issue of a new paper currency, but that it met with bad success. [6]

In other words, the specter of easy money haunted China in the 19th century as well. As Yule mentions, four centuries of disuse were apparently enough for Chinese authorities to forget the country's bad experiences with that system.

Yule also mentions a vague connection between Marco Polo and yet another attempt at paper-money in Persia at the time of Polo's travels. Having exhausted the Treasury in 1294, Kaikhatu Khan, on the suggestion of a financial officer named Izzuddin Muzaffar, introduced a copy of the Chinese Chao money in the districts under his control. Even details like Chinese characters were present on the notes, as was the name Chao itself. After the constrained use of the Chao for two or three days Tabriz was in an uproar; the markets were closed; the people rose and murdered 'Izzuddin; and the whole project had to be abandoned.

These trial-and-error jigsaws of economic stupidity are clear examples of the easy money trap, as coined by Saifedean Ammous. The supposedly full-reserve bank notes of the Mongol dynasty would ultimately fail due to the fact that the unanswerable powerful had few incentives to keep the reserve ratio intact. Wars were costly and frequent in 13th and 14th century China, which could be what tipped the authorities to the point where they decided to print more notes than they had backing for. The stock-to-flow ratio in other words, if the stock equated actual species reserves and the flow equated the printing of new paper-money, would have deteriorated catastrophically.

[1] Ibn Battúta. (1325-1354). Travels in Asia and Africa. Translated by H. A. R. Gibb. London: Routledge & Kegan Paul Ltd., p.284.

[2] Marco Polo. (1271-1295). The Book of Ser Marco Polo, the Venetian Vol I. Translated by Colonel Henry Yule, C.B. London: John Murray., p.378.

[3] Ibid., p.cxxxiii.

[4] Ibid., pp.380-381.

[5] Ibid., p.382.

[6] Ibid., pp.382-383.