Tuesday, August 25, 2009

History of Chinese Currency: The Continual Failure of Paper Money

I enjoyed reading the following excerpt from Wikipedia, I decided to post it:
During the early Song dynasty (Chinese: 宋, 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 promissary 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 twelfth 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: 元, 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.
Silver sycee (yuanbao) ingots

The early Ming dynasty (Chinese: 明; pinyin: Míng, 1368-1644) also attempted to use paper currency in the early re-unification period. This currency also experienced rapid inflation and issues were suspended in 1450 although notes remained in circulation until 1573. It was only in the very last years of the Ming dynasty when Li Zicheng threatened Beijing in 1643 and 1644 that printing took place again. For most of the Ming China had a purely private system of currency for all important transactions. Silver, which flowed in from overseas, began to be used as a currency in the Far South province of Guangdong where it spread to the lower Yangzi region by 1423 when it became legal tender for payment of taxes. Provincial taxes had to be remitted to the capital in silver after 1465, salt producers had to pay in silver from 1475 and corvée exemptions had to be paid in silver from 1485. The Chinese demand for silver was partially met by Spanish imports from the Americas, in particular Potosi in Peru and Mexico, after the Spanish became established at Manila in 1571. However the silver was not minted. It circulated as ingots (known as sycee or yuanbao) which weighed a nominal liang (about 36 grammes) although purity and weight varied from region to region. The liang was often referred to by Europeans by the Malay term tael.

Late Imperial China maintained both a silver and a copper currency system. The copper system was based on the copper cash (wen). The silver system had several units which by the Qing Dynasty were: 1 tael = 10 mace = 100 candareens = 1000 li (silver cash).

In 1889, the Chinese yuan was introduced at par with the Mexican Peso and was subdivided into 10 jiao (角, not given an English name, cf. dime), 100 fen (分, cents), and 1000 wen (文, cash). The yuan was equivalent to 7 mace and 2 candareens (or 0.72 tael) and, for a time, coins were marked as such in English.

The earliest issues were silver coins produced at the Kwangtung mint in denominations of 5 fen, 1, 2 and 5 jiao and 1 yuan. Other regional mints were opened in the 1890s producing similar coins. Copper coins in denominations of 1, 2, 5, 10 and 20 wen were also issued. The central government began issuing its own coins in the yuan currency system in 1903. Banknotes were issued in yuan denominations from the 1890s by several local and private banks, along with the "Imperial Bank of China" and the "Hu Pu Bank" (later the "Ta-Ch'ing Government Bank"), established by the Imperial government.

15 comments:

Douglas Porter said...

Yes, hyperinflation (1260) is a bad thing, but, the Chinese, have, used, paper, currency, for, a thousand, years.. Voltaire, is, therefore, stupid.

Josh said...

960 - 1073 - Coins

1024 - 1200s - Paper money backed by coins began circulating

1271 - 1287 - FIRST FIAT PAPER CURRENCY, FAILED WITHIN 16 YEARS

1287 - REPLACED ONE PAPER CURRENCY WITH ANOTHER WHICH STILL SUFFERED MASSIVE INFLATION

1368 - NEW PAPER FIAT CURRENCY, SO USELESS THEY STOPPED PRINTING IN 1450

For most of the Ming Dynasty (1368 - 1644), there was a purely private system of currency for important transactions.

If this isn't an example of a failing paper currency, I'm not sure what is: "The governments of both Hongwu and Zhengtong (r. 1435-1449) attempted to cut the flow of silver into the economy in favor of paper currency, yet mining the precious metal simply became a lucrative illegal pursuit practiced by many.[83] Hongwu was unaware of economic inflation even as he continued to hand out multitudes of banknotes as awards; by 1425, paper currency was worth only 0.025% to 0.014% its original value in the 14th century.[13] The value of standard copper coinage dropped significantly as well due to counterfeit minting; by the 16th century, new maritime trade contacts with Europe provided massive amounts of imported silver, which increasingly became the common medium of exchange.[84] As far back as 1436, the southern grain tax had been partially commuted to payments in silver.[85] In 1581 the Single Whip Reform installed by Grand Secretary Zhang Juzheng (1525-1582) finally assessed taxes on the amount of land paid entirely in silver"

And finally:

"Late Imperial China maintained both a silver and a copper currency system. The copper system was based on the copper cash (wen). The silver system had several units which by the Qing Dynasty were: 1 tael = 10 mace = 100 candareens = 1000 li (silver cash)."

China is a perfect example of 1000 years of government attempting to force its own fiat paper currency on the people and continually failing to do so as the market kept reverting back to precious metals despite the government.

Saying they've used paper currency for a thousand years and therefore Voltaire is wrong, is simplistic and ignorant. China proves his point.

Douglas Porter said...

No, the last 1000 years of Chinese paper currency is a perfect example of what happens when centralized, non/anti-democratic forces rule a country. It had nothing to do with paper currency. And, no, the FED is nothing like those Emperors.

As I said, Voltaire was stupid on this point. The Chinese paper currency was hyper-printed by dictators. It was always replaced by those emperors by more money, BECAUSE of the corruption of those Emperors, NOT because of the essential nature of paper currency.

Josh said...

The problem with paper currency, and its nature, is directly related to how corrupt individuals can manipulate it.

Paper money is controlled by MEN and MEN are imperfect and corruptible and therefore paper money will ALWAYS fail.

Voltaire is dead on.

Josh said...

The most important point here is that you used the history of China as a point to prove Voltaire wrong.

You have since admitted that paper currency failed under the Chinese and now you do not have historical reference to prove Voltaire wrong.

Your argument has since turned into "under a democratic society, paper currency will succeed because there are no emperors to print it into oblivion". Well, the FED has been around since 1913 and the BOC since the 30s, and considering in the span of history this is a relatively short life, I guess we'll have to see won't we?

So for now, there is no historical reference to prove Voltaire wrong.

Douglas Porter said...

"The problem with paper currency, and its nature, is directly related to how corrupt individuals can manipulate it.

Paper money is controlled by MEN and MEN are imperfect and corruptible and therefore paper money will ALWAYS fail.

Voltaire is dead on."

Nope. In a democratic society things are different. Sure, in an autocratic, dictatorial, aristocratic, or tyrannical society it is more likely to happen, thought not absolutely likely to happen, but in a democratic society there is lots of control. Paper currencies to date, in Western democracies, have been a success.

"The most important point here is that you used the history of China as a point to prove Voltaire wrong."

No, Voltaire is wrong for the same reason you are wrong. It is not paper currency that is fundamentally flawed, but the people in democratic societies that allow corrupt politicians to pass legislation that centralizes power. Take away the corrupt or honest people, and all you have is flattened tree pulp and ink.

"You have since admitted that paper currency failed under the Chinese and now you do not have historical reference to prove Voltaire wrong."

Paper currency didnt fail under the Chinese. The Chinese failed under the Chinese. Even gold has failed over and over again, historically. And if I am not mistaken, that article states that the silver standard also failed. Why? Because of corrupted authority.

"Your argument has since turned into "under a democratic society, paper currency will succeed because there are no emperors to print it into oblivion". Well, the FED has been around since 1913 and the BOC since the 30s, and considering in the span of history this is a relatively short life, I guess we'll have to see won't we?"

The FED will have to print the currency so much that it is not worth anything. Do you understand how much new money would have to be printed to achieve that, Josh? Before this little crisis, the inflation rate never topped 5 percent. It is only the deregulation of the banks and the movement of jobs over to China that caused the crisis. Without the crisis, the inflation would not have changed and your little band of stupidity would still be stupider than stupid.

You have since admitted that paper currency failed under the Chinese and now you do not have historical reference to prove Voltaire wrong.

Your argument has since turned into "under a democratic society, paper currency will succeed because there are no emperors to print it into oblivion". Well, the FED has been around since 1913 and the BOC since the 30s, and considering in the span of history this is a relatively short life, I guess we'll have to see won't we?

So for now, there is no historical reference to prove Voltaire wrong.

Josh said...

This isn't going to turn into an argument over whether or not paper money in our current system is better than the gold standard.

The point here is that you you're saying Voltaire is wrong and you're referencing the Chinese as an example of how wrong he is, even though every paper currency that the Chinese ever implemented failed.

"It is not paper currency that is fundamentally flawed, but the people in democratic societies that allow corrupt politicians to pass legislation that centralizes power."

This is like saying, there's nothing wrong with a dictatorship as long as the dictator is Jesus. LOL. Power corrupts, and as imperfect beings, even the best of us can be corrupted by power.

"Even gold has failed over and over again, historically."

Gold has only failed when government was in control of minting the coins (i.e. the Romans). Of course, its much harder for a government to counterfeit coinage than it is paper, so inflating becomes much more difficult, especially in a free society. But saying that paper money doesn't fail in the long run because gold has failed historically in not a rational argument. Paper has always, ultimately, failed.

"And if I am not mistaken, that article states that the silver standard also failed."

It appears to me that the silver standard prevailed...how did it fail?

"The FED will have to print the currency so much that it is not worth anything. Do you understand how much new money would have to be printed to achieve that, Josh? Before this little crisis, the inflation rate never topped 5 percent. It is only the deregulation of the banks and the movement of jobs over to China that caused the crisis. Without the crisis, the inflation would not have changed and your little band of stupidity would still be stupider than stupid."

There is so much in here I would like to argue, but unfortunately its all irrelevant to the current argument.

You have still failed to prove Voltaire wrong. Chinese paper currency has always failed in the long run. I don't believe any current fiat systems in the world can be used to back an argument against Voltaire because none have been around long enough. Can you site a fiat paper currency that has survived the test of time to prove him wrong?

Douglas Porter said...

"This isn't going to turn into an argument over whether or not paper money in our current system is better than the gold standard."

You quoted Voltaire. I thus concluded you wanted to have this argument again.

Philosophy is a circle.

"The point here is that you you're saying Voltaire is wrong and you're referencing the Chinese as an example of how wrong he is, even though every paper currency that the Chinese ever implemented failed."

No, I'm saying Voltaire was wrong because he put the emphasis on the technique, not the source of the problem. It was a causal mistake on his part, probably because he was reading too much Hume.

"This is like saying, there's nothing wrong with a dictatorship as long as the dictator is Jesus."

Not at all. Paper currency is not Jesus.

"Power corrupts, and as imperfect beings, even the best of us can be corrupted by power."

That's a very nice pre-American revolution notion, but modern governance uses check-and-balances to eliminate that problem. The same can be implemented with the printing of money, and, in my opinion, has. The printing of money in Western democracies has come no where close to Weimar.

"Gold has only failed when government was in control of minting the coins (i.e. the Romans). Of course, its much harder for a government to counterfeit coinage than it is paper, so inflating becomes much more difficult, especially in a free society. But saying that paper money doesn't fail in the long run because gold has failed historically in not a rational argument. Paper has always, ultimately, failed."

Nope, the Chinese merely reset the value by instituting a new denomination. It happened here in Korea and the Won has been successful. Why? Not because they adopted the gold standard, but because they adopted a higher standard for their officials.

Also, if I am not mistaken, not long after gold was inflated, the Roman Empire collapsed. Hmmmmmmm.. The Chinese also speak of this type of cyclical collapse. Why? Because people get lazy and don't control their fucking leaders or because the governmental system is flawed to begin with.

"It appears to me that the silver standard prevailed...how did it fail?"

Corruption.

"The value of standard copper coinage dropped significantly as well due to counterfeit minting; by the 16th century,"

"The governments of both Hongwu and Zhengtong (r. 1435-1449) attempted to cut the flow of silver into the economy in favor of paper currency, "

Thanks for proving my point, Josh. Authority is the root of the problem, not the implementation of paper currency.

"There is so much in here I would like to argue, but unfortunately its all irrelevant to the current argument."

Nope. A 4 percent inflation rate will not cause hyperinflation. The allies demanded many times more gold than the ENTIRE German economy had after WWI. THAT is what caused the printing of money many times more than the worth of the entire economy. And THAT'S what caused inflation.

"You have still failed to prove Voltaire wrong. Chinese paper currency has always failed in the long run. I don't believe any current fiat systems in the world can be used to back an argument against Voltaire because none have been around long enough. Can you site a fiat paper currency that has survived the test of time to prove him wrong?"

It is not the technique of value that is wrong, but the control of that technique. Sorry, you are still wrong.

Josh said...

"No, I'm saying Voltaire was wrong because he put the emphasis on the technique, not the source of the problem. It was a causal mistake on his part, probably because he was reading too much Hume."

And you have no historical basis to support your theory that it was the political system, not the paper, that caused the problem.

"but modern governance uses check-and-balances"

Who checks and balances? Other imperfect beings. . .the corruption is more difficult to implement, but still an inevitability.

"The printing of money in Western democracies has come no where close to Weimar."

http://mises.org/markets.asp

Please review the true money supply graph.

"Also, if I am not mistaken, not long after gold was inflated, the Roman Empire collapsed. Hmmmmmmm.. The Chinese also speak of this type of cyclical collapse. Why? Because people get lazy and don't control their fucking leaders or because the governmental system is flawed to begin with."

Yes, inflating the money supply typically results in the collapse of empires...good point. I do agree it has a lot to do with the governmental system: government should not control the money supply.

"The value of standard copper coinage dropped significantly as well due to counterfeit minting; by the 16th century,"

"The governments of both Hongwu and Zhengtong (r. 1435-1449) attempted to cut the flow of silver into the economy in favor of paper currency,"

Noone here is arguing for a "copper standard"..lol. Funny you should mention the cut of the flow of silver. Canada and the US taxes importations of gold and silver while countries like India and China promote the importation of these precious metals. FDR even made it illegal to hold gold and it wasn't until Nixon that gold became legal to own again in the US. All of your Keynesian friends thought the value of gold would drop to nothing after they removed the link to gold in '71...boy were they wrong (nothing new there though).

So modern governments try the same tricks the old governments do. But that wasn't proof the silver standard failed. Its proof the government then applied force to the market, not allowing those who want silver to own. Its proof silver would have flourished instead of the government currency.

"Authority is the root of the problem, not the implementation of paper currency."

"It is not the technique of value that is wrong, but the control of that technique. Sorry, you are still wrong."

Well, the paper currency by nature provides those in authority with too much power. So it really goes hand in hand. Without authority telling us to use paper currency, would we? I think not. Can authority exist in a way our governments think it needs to exist without paper currency? I think not. SO they legitimize each other.

If authority used gold coins, then the authority would be much more restricted by the quantity of gold, however if we lived in a free society, people would most likely use gold or silver as it is much more stable and cannot be counterfeited.

Douglas Porter said...

"And you have no historical basis to support your theory that it was the political system, not the paper, that caused the problem."

Of course I do. The Chinese state had always been centralized and hence more prone to corruption. Thus, the institution of a paper currency, because special metals are a pain in the ass to exchange, would inevitably lead to cyclical corruption and very high inflation.

"Who checks and balances? Other imperfect beings. . .the corruption is more difficult to implement, but still an inevitability."

Not at all. Look at Maddoff.

"http://mises.org/markets.asp

Please review the true money supply graph."

The printing of money in Western democracies has come no where close to Weimar.

Weimar printed it's economy's total many times over in a short period of time, hence eliminating the period when prices catch up to inflation. It did this because it had to pay an unreasonable amount of money in reparations.

"Yes, inflating the money supply typically results in the collapse of empires...good point. I do agree it has a lot to do with the governmental system: government should not control the money supply."

You are ignoring the fact that the government has always controlled the money supply. Ancient governments always minted coins.

"Noone here is arguing for a "copper standard"..lol. Funny you should mention the cut of the flow of silver. Canada and the US taxes importations of gold and silver while countries like India and China promote the importation of these precious metals. FDR even made it illegal to hold gold and it wasn't until Nixon that gold became legal to own again in the US. All of your Keynesian friends thought the value of gold would drop to nothing after they removed the link to gold in '71...boy were they wrong (nothing new there though)."

Gold has ornamental value associated with its long-standing use as a medium of value. Therefore, I don't know why they would think that. Also, I am not a Keynesian.

"So modern governments try the same tricks the old governments do. But that wasn't proof the silver standard failed. Its proof the government then applied force to the market, not allowing those who want silver to own. Its proof silver would have flourished instead of the government currency."

Ah, but it is exactly the same, because the gov applied force on the market. How do you stop that, Josh?

"Well, the paper currency by nature provides those in authority with too much power. So it really goes hand in hand. Without authority telling us to use paper currency, would we? I think not. Can authority exist in a way our governments think it needs to exist without paper currency? I think not. SO they legitimize each other."

I don't think so. It wasn't paper currency that created the FED and took the printing of money out of the people's hands.

"If authority used gold coins, then the authority would be much more restricted by the quantity of gold, however if we lived in a free society, people would most likely use gold or silver as it is much more stable and cannot be counterfeited."

We are not discussing counterfeit money, Josh. And, yes, if the authority is corrupt, it can just as easily reduce the amount of gold in millions of coins and then reintroduce them into circulation.

Douglas Porter said...

http://query.nytimes.com/mem/archive-free/pdf?res=9F03E1DB1431EF33A2575BC0A9679D946095D6CF

Douglas Porter said...

They effectively tripled the money supply in three years. THREE YEARS, JOSH. THAT IS NOT HAPPENING THE UNITED STATES. EVEN WITH THE VON MISES IS STUPID GRAPH IT IS A MERE FRACTION AND MUCH MUCH SLOWER, HENCE ALLOWING PRICES TO CATCH UP.

Josh said...

"You are ignoring the fact that the government has always controlled the money supply. Ancient governments always minted coins."

I don't ignore this. I'm arguing we need to evolve away from it.

"Therefore, I don't know why they would think that."

Because they thought the majority of its value was based on its use as a standard currency.

You're not a Keynesian? Fooled me.

"Ah, but it is exactly the same, because the gov applied force on the market. How do you stop that, Josh?"

You limit the power of government.

"It wasn't paper currency that created the FED and took the printing of money out of the people's hands."

No, but if paper money wasn't available, what would the Fed use? Keep in mind, I'm sure there are other substances that the Fed could use that would be easily reproducible, such as paper. Paper just happens to be the standard fiat currency. Without the existence of a currency the Fed could adopt that's easily created, the Fed wouldn't exist. Its function would disappear.

"We are not discussing counterfeit money, Josh."

Counterfeit is the inherent nature of paper currency.

"And, yes, if the authority is corrupt, it can just as easily reduce the amount of gold in millions of coins and then reintroduce them into circulation."

Which is why I would argue the government should control the minting of coins either.

"EVEN WITH THE VON MISES IS STUPID GRAPH IT IS A MERE FRACTION AND MUCH MUCH SLOWER, HENCE ALLOWING PRICES TO CATCH UP."

Noone is arguing they've printed the money as fast. The question is what will happen if foreign investments start to sell of all of their US dollars. Would you not think, even if you don't think there will be a run on the US dollar, but if there was, would hyperinflation not occur?

Chris said...

"I don't ignore this. I'm arguing we need to evolve away from it"

Gold is not an evolution, Josh, it is a step backwards. Encrypted units would be an evolution..

"Because they thought the majority of its value was based on its use as a standard currency."

It is, but it has had secondary uses. People like shiny things. It is a fact. Rubies were never used as a primary means of exchange, but people still give up a lot of value to acquire them.



"You're not a Keynesian? Fooled me."

Zero thinking = easily fooled.

I am a propositionalist and empiricist.

"You limit the power of government."

And how do you limit the power of government?

"No, but if paper money wasn't available, what would the Fed use?"

THOSE GODDAMNED TREES AND CHINESE FUCKING PISS ME OFF SO MUCH WITH THEIR PAPER CREATING FED CREATING BULLSHIT!

"Keep in mind, I'm sure there are other substances that the Fed could use that would be easily reproducible, such as paper. Paper just happens to be the standard fiat currency."

No, it doesn't "just happen to be" the standard currency, Josh. It is the standard currency because that is what people write notes on. ONCE UPON A TIME, BECAUSE gold is such a pain in the ass to carry around,
banks issued notes of ownership of that gold so that people would not have to carry gold around. This led to big stores of gold piling up and paper circulating as the primary means of exchange. It was only a small leap from there to see that paper currency would be easier, especially with growing populations and gold being hard to find.


"Without the existence of a currency the Fed could adopt that's easily created, the Fed wouldn't exist. Its function would disappear."

WRONG. The FED would exist just fine and dandy. It would give out loans based on a reserve of gold, which would allow it to continue to produce money out of thin air based on the assumption that people would later create the wealth by working to pay of the loan to pay for their houses. Jesus Christ, are you even thinking about the videos that you post?

"Counterfeit is the inherent nature of paper currency."

WRONG. Corruption is the inherent nature of counterfeit, and yes there was counterfeit gold coins once upon a time, Josh.. Remember The Smurfs?

"Which is why I would argue the government should control the minting of coins either. "

BUT THE GOVERNMENT IS CORRUPT!

"Noone is arguing they've printed the money as fast."

Yes, you and your idiot buddies are. That is why they keep making these stupid graphs: to insinuate, with their dramatic mountains, that we are heading toward Weimar Germany. That is why we keep hearing about it and that is why we keep seeing these graphs.

Chris said...

"The question is what will happen if foreign investments start to sell of all of their US dollars. Would you not think, even if you don't think there will be a run on the US dollar, but if there was, would hyperinflation not occur?""

THEN WHY DO WE NEED THESE FUCKING GRAPHS IF INFLATION IS GOING TO HAPPEN BECAUSE OF THE CHINESE DEMAND THEIR INVESTMENT BACK? THE GRAPHS SUGGEST THAT HYPER-INFLATION IS GOING TO HAPPEN BECAUSE OF INFLATION!

I think that if the Chinese demand all of their investments back, and this causes a run on the American dollar, the American dollar will be worth less in relation to other currencies. For example, the Canadian dollar has always been worth less compared to the American dollar, but it hasn't affected prices in Canada itself, EXCEPT for products imported into Canada. So, yes, their would be an increase on prices for good imported into the United States, just as there is in any country whose currency is worth less than other currencies.

If this leads the government to print more dollars, then this too could lead to inflation.

The good thing I see is the fact that a majority of the money is held by the Chinese government itself, which means the dollar ain't going anywhere dramatically downwards, because the Chinese government has an inherent interest in keeping the American dollar strong: keeping the Chinese manufacturing sector going. DUH>