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Chinese credit derivatives under Kublai Khan [1200 AD]

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Published : February 28th, 2009
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The Chinese were not strangers to paper money. The first apparent use of paper as money was Chinese - in about 140 BC, although how it ended is not known.

In the early part of the 11th century iron coin was in circulation, but it was overissued and fell in value so that true 'felted' paper was used to represent inconveniently large monetary multiples. This occurred in Szechuan province as an innovation of a private bank. Ostensibly the issued notes were redeemable in three years. 15 similar banks copied the idea and the notes in issue rapidly grew in number, rather faster than did the reserves of the banks. By 1032 all the banks which had issued them had failed.

Chinese government paper money was then issued in 1131 AD to finance military spending and soon afterwards official paper issue started in earnest. New notes were issued in rapidly increasing numbers and redemption rights into metal were soon suspended. Notes went into circulation on the back of public confidence in the institutions of state, and the provincial governments started issuing in their own name towards the end of the 12th century.

In 1215 the awesome Genghis Khan overran most of China. Complete power was not immediate, largely because Genghis set off to overrun Asia and terrorise even Eastern Europe, but later between 1260 and 1263, when his grandson Kublai was Chinese emperor,  there was an extensive issue of paper money known as the 'First Mongol Issue', which fairly rapidly depreciated.

It was followed by the Second Mongol Issue, equally irredeemable, and unlimited in issue, which happened between 1264 and 1290. It was described by Marco Polo in one history's great books :-

"The emperor's mint then is in this same city of Cambaluc, and the way it [money] is wrought is such that you might say he has 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 the whole districts are full of them. What they take is a certain fine white bast or skin which lies between the wood of the tree and the thick outer bark, and this they make into something resembling sheets of paper, but black. When these sheets have been prepared they are cut up into pieces of different sizes.

All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver; and on every piece a variety of officials, whose duty it is, have to write their names, and to put their seals. And when all is prepared duly, the chief officer deputed by the Khan smears the seal entrusted to him with vermilion, and impresses it on the paper, so that the form of the seal remains imprinted upon it in red; the money is then authentic. Anyone forging it would be punished with death. And the Khan causes every year to be made such a vast quantity of this money, which costs him nothing, that it must equal in amount all the treasure of the world.

Furthermore all merchants arriving from India or other countries, and bringing with them gold or silver or gems and pearls, are prohibited from selling to any one but the emperor. He has twelve experts chosen for this business, men of shrewdness and experience in such affairs; these appraise the articles, and the emperor then pays a liberal price for them in those pieces of paper. The merchants accept his price readily, for in the first place they would not get so good an one from anybody else, and secondly they are paid without any delay. And with this paper money they can buy what they like anywhere over the empire" Marco Polo - The Travels

Life under this system was actually extremely good.

"This was the most brilliant period in the history of China. Kublai Khan, after subduing and uniting the whole country and adding Burmah, Cochin-China, and Tonquin to the empire, entered upon a series of internal improvements and civil reforms, which raised the country he had conquered to the highest rank of civilization, power and progress. Tranquillity succeeded the commotions of the previous period; life and property were amply protected; justice was equally dispensed; and the effect of a gradual increase in the currency, which was jealously guarded from counterfeiting, was to stimulate industry and prevent the monopolization of capital. It was during this era that the Imperial canal, 1660 miles long, together with many other notable structures were built." Del Mar

Inflation took hold in 1287.  The second Mongol issue continued falling in value until about 1310. At about this time a third issue replaced the second, duplicating the 5 - 1 ratio with which the second had replaced the first. Then things changed markedly for the worse.

"Population and trade had greatly increased, but the emissions of paper notes were suffered to largely outrun both, and the inevitable consequence was depreciation. All the beneficial effects of a currency which is allowed to expand with a growth of population and trade were now turned into those evil effects that flow from a currency emitted in excess of such growth. These effects were not slow to develop themselves. Excessive and too rapid augmentation of the currency, resulted in the entire subversion of the old order of society. The best families in the empire were ruined, a new set of men came into the control of public affairs, and the country became the scene of internecine warfare and confusion." Del Mar

In the final phase of the Mongol dynasty in about 1350 huge efforts were made to correct the management of the currency but the situation was beyond repair, monetary paper having been issued in one form or another by all manner of private, provincial and central government agencies in what amounted to an explosion of credit.

Upon the demise of the Mongol system of government which had presided over so many benefits only to see them destroyed through financial crisis, the usurping Ming dynasty issued yet more paper currency with the solemn legend "This paper money shall have currency, and be used in all respects as if it were copper money". There was no public confidence in the firmness of this declaration and at the outset the paper traded at 17 : 13 against copper coinage. Before long the ratio fell to 300 : 1.

It was reported that gold and silver crept quietly back into circulation. If they did it was deeply unofficial, because neither was being minted in China at that time.


Paul Sustain

Director and Founder

Bullionvault.com







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