Although China’s pre-revolution hyperinflation during the 1940s is the one that one often hears about, there is a less-documented hyperinflation that occurred in ancient China. The first civilization in the world to use paper currency, well over a millennium before paper money first appeared in Europe, China experienced hyperinflation under the Yuan Dynasty (1278-1368).

What provoked this hyperinflation in ancient China? The primary cause seems to have been reckless printing of paper money to support and expand a war chest to buy off potential invaders from the north. However, historians and economists have also posited civil wars, natural disasters, and imperial grants. Introduced in 1260, the value of the paper money depreciated by a whopping 1000% by 1309. So, what happened?

Hyperinflation is an economic condition of rapid and unrestrained price increases of commodities in a short span of time. It can be roughly calculated as an increase of 50% or more in a month or less. Some historians have also argued that inflation was only moderate by modern standards, as prices increased by a factor of 140 during a 96 year period. This is an average annual inflation rate of 5.2%. So, are the claims around hyperinflation even fair?

Yuan China and the Earliest Silver Standard Monetary System

When China was unified under Qin Shi Huang for the first time in its history in 220 BC, a two-tier currency system was introduced – a higher form of currency made of gold, and a lower form of currency made of bronze. For the first time in human history, money and purchasing power was created by government fiat throughout mainland China.

Incidentally, it was also in China for the first time in history, that a political regime pegged paper money to a precious metal, and deployed fiat money as the sole legal tender. The Yuan dynasty , introduced silver-convertible paper money, but were viewed with suspicion and hostility as they were Mongols. They built on the first paper money introduced around 1005 by the Northern Song dynasty .

The Northern Song dynasty introduced paper money in China around 1005 AD. Reproduction of a Song Dynasty note. ( Public Domain )

With this one action, they combined their own tradition of using silver as a medium of exchange with the Chinese tradition of paper money . China then transitioned from a bronze coin-based economy, to a silver-backed paper money economy – the earliest silver standard monetary system. This finally replaced a confusing monetary system that included copper coins, iron coins, and silver ingots, bringing an end to the chaos of the previous decades.

Yuan dynasty era coins – the earliest silver standard monetary system. The new paper currency may have exacerbated hyperinflation in ancient China (PHGCOM / CC BY SA 3.0 )

When arriving in China,  Marco Polo  wrote that he was astonished after witnessing Kublai Khan ’s monetary system:

"In this city of Cambalu [another spelling for Khanbaliq] is the mint of the grand Khan, who may truly be said to possess the secret of the alchemists, as he has the art of producing money…this paper currency is circulated in every part of the grand khan’s dominions; nor dares any person, at the peril of his life, refuse to accept it in payment."

"All his subjects receive it without hesitation, because wherever their business may call them, they can dispose of it again in the purchase of merchandise they may have occasion for, such as pearls, jewels, gold, or silver. With it, in short, every article may be procured… All his majesty’s armies are paid with this currency, which is to them of the same value as if it were gold or silver. Upon these grounds, it may certainly be affirmed that the grand khan has a more extensive command of treasure than any other sovereign in the universe."

Marco Polo and his brothers in the court of Kublai Khan. Khan gives them a tablet, circa 1410 ( Public Domain )

Depreciation: Wars and Poor Economic Mismanagement

As had become customary of the Mongols, a desire to completely wipe out the vestiges of previous regimes through incredibly violent means persisted. Kublai Khan sought to wipe out the Southern Song completely, initiating a number of wars in the 1270s to unify north and south China. Simultaneously, as advised by many officials, he also initiated wars to conquer south-east Asia and Japan.

Similar to other cases in history, financing an empire founded on warfare results in a depreciation of the treasury. To counter the Southern Song’s huizi, the silver-backed currency called zhongtongchao was issued in greater numbers. This period was also marked by reasonable investments in public infrastructure and constructions, which further exacerbated the hyperinflation.

The Southern Song dynasty’s huizi banknotes were replace by the Yuan dynasty; however, war and overspending may have caused hyperinflation. ( Public Domain )

In 1287, zhiyuanchao, a new paper currency was introduced, whose value was allegedly five times the value of the old. Both currencies were allowed to operate at the same time, but the zhongtongchao’s value had almost plummeted by 80% by then. In 1311, these two paper currencies were reissued after being discontinued, but were no longer guaranteed or backed by silver. The monetary system had changed to de jure fiat money, which would last a full forty years.

In 1352, the final paper currency, the zhizengchao was issued, but the crumbling empire led to a rapid depreciation and decline of its value. Paper money had become virtually worthless by the time the Ming Dynasty toppled the Yuan in 1368. By that time, most towns, prefectures, counties, and cities had reverted to a barter economy!

A Yuan dynasty zhongtongchao or jiaochao banknote, with its printing wood plate from 1287. The bottom half of the note says "(this note) can be circulated in various provinces without expiration dates. Counterfeiters will be put to death. (PHGCOM / CC BY SA 3.0 )

Did Yuan Hyperinflation Cause Economic Collapse?

Warfare was one of the main reasons for the collapse of this experiment, but there were other factors - like China’s size. Even today, China is the world’s third largest country by land area, spanning a whopping 3.7 million square miles (9.6 million square kilometers). Additionally, China lacked domestic reserves of silver; the metal had to be imported first from Japan, and then from the Americas, creating a trade deficit that lasted into the late Ming era.

Moreover, metal standards had the power to restrict money over-issuances, but the ever-increasing fiscal pressure brought on by warfare made a stable metal standard unsustainable. During the Song war years, for example, silver stored in local warehouses was transported to the capital, and used to directly fund military expenditures.

Occurring early on in the history of currency, this experience showed that Kublai Khan’s economic policies were not as watertight as the public had been led to believe. Additionally, the lack of enough gold and silver meant the public could not exchange currency for a fixed rate

By the time the 1350s rolled around, paper notes had begun to be issued by private, provincial, and central government agencies. This led to an explosion in credit, leading to a precipitous fall in value.

The final nail in the coffin came by way of Kublai Khan’s death , creating a power vacuum. The dynasty spent a substantially greater amount of revenue maintaining the royal families and their ministers to stabilize the regime. Commodity prices had increased tenfold by the late 13th century, leading to great hardships among the common people.

It would be fair to argue that the paper currency experiment in Yuan China was revolutionary, since it came almost 500 years before European and other Western economies followed suit.

However, deeming this a period of hyperinflation is erroneous, because statistically, the inflation rate was only 5.2% per annum by modern standards. It was not hyperinflation, but the largesse of a bourgeoning empire and constant strife and warfare were the primary reasons why the dynasty and the currency would both meet an untimely collapse.

The first Ming emperor, Hongwu, who reigned until 1398, was much more careful, having learned from the bitter experiences of the Yuan. He attempted to restore copper coins as the chief medium of exchange, but an inadequate supply forced a reversion to paper money. Within two decades of its launch, its nominal value was less than a quarter of its real value.

The dawn of the 15th century saw China enter four centuries of bimetallic currency, copper coins for daily transactions and silver for long distance trade and large payments. During the 19th century, under pressure from the West, China was forced to go back to paper money. The constant changing motions of currency thus found roots in the practices of the past.

Top image: Hyperinflation is commonly caused by rapidly printing currency, and the Yuan dynasty printed non-stop to fund war. Shown: Bills from the Xuantong era (1909-1911) Source: Public Domain

By Sahir Pandey