Currency and the Emergence of China's Market Economy

China's Song dynasty (960-1279 C.E.), building on developments of the earlier Tang dynasty (618-907 C.E.), saw a remarkable economic expansion in which increasing agricultural and industrial production, as well as internal and international trade, played important roles in establishing a market economy. China's various regions increasingly specialized in the cultivation of particular food crops or the production of particular manufactured goods, trading their own products for imports from other regions. The market was not the only influence on the Chinese economy: government bureaucracies played a large role in the distribution of staple foods such as rice, wheat, and millet, and dynastic authorities closely watched militarily sensitive enterprises such as the iron industry. Nevertheless, millions of cultivators produced fruits and vegetables for sale on the open market, and manufacturers of silk, porcelain, and other goods supplied both domestic and foreign markets. The Chinese economy became more tightly integrated than ever before, and foreign demand for Chinese products fueled rapid economic expansion.

Indeed, trade grew so rapidly during Tang and Song times that China experienced a shortage of the copper coins that served as money for most transactions. To alleviate the shortage, Chinese merchants developed alternatives to cash that resulted in even more economic growth. Letters of credit came into common use during the early Tang dynasty. Known as "flying cash," they enabled merchants to deposit goods or cash at one location and draw the equivalent in cash or merchandise elsewhere in China. Later developments included the use of promissory notes, which pledged the payment of a given sum of money at a later date, and checks, which entitled the bearer to draw funds against cash deposited with bankers.

The search for alternatives to cash also led to the invention of paper currency. Wealthy merchants pioneered the use of printed paper money during the late ninth century. In return for cash deposits from their clients, they issued printed notes that the clients could redeem for merchandise. In a society short of cash, these notes greatly facilitated commercial transactions. Occasionally, however, because of temporary economic reverses or poor management, merchants were not able to honor their notes. The resulting discontent among creditors often led to disorder and sometimes even to riots.

By the eleventh century, however, the Chinese economy had become so dependent on alternatives to cash that it was impractical to banish paper currency altogether. To preserve its convenience while forestalling public disorder, governmental authorities forbade private parties from issuing paper currency and reserved that right for the state. The first paper money printed under government auspices appeared in 1024 in Sichuan province, the most active center of early printing. By the end of the century, government authorities throughout China issued paper money - complete with identification numbers and dire warnings against the printing of counterfeit (illegal) notes.

Printed paper money caused serious problems for several centuries after its appearance. Quite apart from the contamination of the money supply by counterfeit notes, government authorities frequently printed currency representing more value than they actually possessed in cash reserves - a practice not unknown in more recent times. The result was a partial loss of public confidence in paper money. By the late eleventh century, some notes of paper money would fetch only 95 percent of their face value in cash. Not until the Qing dynasty (1644-1911 C.E.) did Chinese authorities place the issuance of printed money under tight fiscal controls. In spite of abuses, however, printed money provided a powerful stimulus to the Chinese economy.

Indeed, high productivity and trade brought the Tang and Song economy a dynamism that China's borders could not restrain. China's consumers developed a taste for exotic goods that stimulated trade throughout much of the Eastern Hemisphere. Spices from the islands of Southeast Asia made their way to China, along with products as diverse as kingfisher feathers and tortoise shell from Vietnam, pearls and incense from India, and horses and melons from central Asia. These items became symbols of a refined, elegant lifestyle - in many cases because of attractive qualities in the commodities themselves but sometimes simply because of their scarcity and foreign provenance. In exchange for such exotic items, Chinese sent abroad vast quantities of silk, porcelain, and lacquerware.