This article discusses monetary thought in ancient China from the perspective of more modern Western monetary theory. It sets out the structure of economic activity in the various dynasties of ancient China and emphasizes the differences in monetary structure from Europe (and later North America). Imperial China was a politically integrated structure with regional segmentation of economic activities and hence with regional money. In various regions different forms of money circulated, with gold, silver, copper, and paper all present at various times. Monetary policy was guided by monetary thought, as later in Europe. Basic concepts such as monetary function, the velocity of circulation, inflation, interest rate parity and the quantity theory were all part of debate. Monetary policy was one body conducted at regional level, but overseen nationally politically before national integration under the Ming dynasty (14th century). The economies of Imperial China witnessed boom and bust, inflation and deflation and monetary control much like in Europe to follow later. Chinese monetary thought seemingly preceded Western thought, but had remarkable similarities. Whether much of this thought travelled down the silk road remains unknown, but the possibility is discussed in Chinese research circles.
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1. Old Chinese economic thought
There are claims from the Chinese scholarly community that many of the key ideas later expressed in Western economic thought were expressed much earlier in Imperial China, admittedly in different statements and with different emphasis. In Imperial China, great issues of the day were often passed to leading thinkers in the court who were given time and staff for reflection and advice. Young scholars (Westerners would call them students) affiliated with at least one of the commissions seemingly passed down the Silk Road, spent some years in Europe and may have talked to Quesnay in France in the 1750’s (who intellectually, in some people’s opinion, was a forerunner of Walras). There is speculation in the Chinese community that some of the key ideas in Western economic thought may have, in part, origins in old Chinese thought. Later, as detailed below, Marx in Das Kapital makes explicit reference to a specific old Chinese thinker (economist). Thus, the intellectual heritage of modern economics (now global) may in some small way reside in China. Here we discuss this theme specifically with reference to monetary thought.
There were also large cultural differences between old Asia and the newer OECD which both divide and inspire contemporary policy debates globally, and specifically across the Pacific. Eastern philosophical tradition does not accept absolute truth, as in the Popperian/Friedmanian current thinking in Western economics. Rather than science with objective truth and progress as represented by forward movement ever closer to the true frontier of knowledge, eastern philosophy argues instead there is only wisdom and knowledge embodied in deep thoughts of old and new texts, with old texts in particular revered because of the tests of time to which they have been subjected. Delving into the wisdom of the past from an Asian traditional perspective as a way of moving forward in decision making on today’s problems thus seems a sensible way for Asians to proceed.
The intellectual melting pot that modern economics has become globally, especially in its neoclassical form, in today’s milieu has impressively formalization in its mathematical statement and these are rigorously econometrically analyzed with data in its empirical manifestation, but despite this economics remains, as Joan Robinson characterized it, as a pseudoscience. The absence of controlled repeatable laboratory experiments for entire economies (even if supplemented by modern experimental economies) implies a science different from physics or chemistry and one more in the tradition of Durkheim’s emphasis on development of chains of deductive logic and careful empires. In the case of economics, the aim is to aid policymakers in reaching decisions on social action. Chinese thought of old thus enters the evaluation of how to proceed in the modern discipline of economics, if old and new knowledge are both given weight.
2. Monetary thought and money in China
Ancient Chinese monetary thought focuses on the structure of economic activity in the various dynasties of ancient China and emphasizes the differences in monetary structure from Europe (and later North America). Imperial China was a politically integrated structure with regional segmentation of economic activities and hence with regional money. Monetary policy was conducted at regional level, but overseen nationally politically even before national integration under the Ming dynasty (14th century). In various regions different forms of money circulated, with gold, silver, copper, and paper all present at various times. Monetary policy was guided by monetary thought, such as later in Europe. Basic concepts such as monetary function, the velocity of circulation, inflation, interest rate parity and the quantity theory were all discussed.
The monetary structure of the economies of ancient China was both varied across dynasties and simultaneously more complex and less well developed than that in Europe. Three different forms of coinage typically circulated (gold, silver, copper). There were no financial institutions involved in credit creation or issuance of insurance contracts, but there were monetary depositories where merchants and others depositing money received a paper certificate which could be exchanged for goods in the various provinces. Paper money is usually first credited to China, and arrived in the late 8th or early 9th century. Originally it was labelled “flying money” because it was so light the wind could blow it out of a holder’s hand. This money was originally a draft rather than bank issued money, but private merchant drafts were taken over by the government in the early 9th century and this currency was used for forwarding local taxes and revenues to the imperial capital. Later, silk notes replaced earlier paper, and older money was exchanged for silk. A unified currency spread throughout China by the late 13th century, and Chinese notes were seemingly a monetary medium in Persia. Marco Polo on his visit to China was impressed by Chinese money. In the Ming Dynasty (14th century) a new note named the “precious note of great rising” was issued but only in one denomination. Copper coins still circulated. Inflation occurred, and the precious note was progressively replaced by silver. In the mid 17th century, the Ming dynasty attempted to revive paper money after 200 years, but with no success. Only under European occupation in more modern times did paper money return. Chinese paper money profoundly influenced Western banking. The original Hamburg and Swedish banks followed earlier Chinese structure. The first western paper money appeared in Sweden in 1661. The US followed in 1690; with France in 1720, England in 1797, and Germany in 1806.
The economies of Imperial China witnessed boom and bust, inflation and deflation and used monetary control much like in Europe to follow. Chinese monetary thought seemingly preceded Western thought, and had remarkable similarities. Whether much of this thought travelled down the silk road remains unknown, but the possibility is much discussed in Chinese research circles.
3. Schools of monetary thought in ancient China
In ancient China, many innovative monetary theories covering both paper money and metal money were developed during several thousand years of development. It is difficult to rigidly divide Chinese economic thought into separate historical schools. Rather, successive groups of scholars shared similar views and understandings, each adding new ideas to earlier theories.
Monetary theory in China may be divided into a number of categories: theories concerning the origin of money; theories as to the invention of money, money as a symbol of kingship, money as a medium of exchange, and money as a facilitator of commerce; theories on the nature of money, nominal money, metallic money, the trade-off between mother and son coins, and theory on the weight of money; theories of monetary circulation, the quantity theory of money, theories on the velocity of circulation, how “good money drives out bad”, and how “paper money drives out metal money”; theories on appropriate monetary policies; theories in favour of government monopoly, centralization of money, state control over money, unification of the monetary system, and theories for or against private coinage; theories of monetary management; theories for state intervention or for free coinage, and on the management of both nominal and real money; discussions of monetary materials. There were theories for real money, metal money, the replacement of money with grain and cloth, and the replacement of paper money with metal money; discussions of how to make money. There were also theories for and against heavy money, theories for and against making money; discussions of the role of paper money. There were theories which regarded paper money as the pillar of the state, theories on the usefulness of paper money, theories in favour of convertible paper money or of inconvertible paper money, and theories on limited issue of money. There were discussions of gold and silver money; theories on the disadvantages of silver money, theories on the co-existence of silver money and copper money, theories on the sole use of silver money or copper money, theories on the gold standard, the silver standard and the Chinese paper money profoundly influenced Western banking. The original Hamburg and Swedish banks followed earlier Chinese structure. The first western paper money appeared in Sweden in 1661. The US followed in 1690; with France in 1720, England in 1797, and Germany in 1806. gold exchange standard.
The dominant view on the origin of money in ancient China was that money was created by the sage-kings.
Money has been a common historical phenomenon in the development of all human society, and money and its laws of its circulation are largely universal despite its different forms in various regions. Many monetary theories were developed earlier in China than in the West. Following Western thought, these theories can also be categorized into the theory of metallic money, the theory of nominal money, the quantity theory of money, the neutrality of money, the demand for money, and the supply of money. Such a categorization weakens the boundaries between ancient Chinese thinking and Western monetary theories.
4.Key thinkers in the history of monetary thought in ancient China
The list of ancient Chinese thinkers on money ranges across a broad spectrum, including politicians, philosophers and finance ministers. Some of them held posts in the Ministry of Finance, but many others had little to do with the administration of the economy. The monetary elements of the economy affected various aspects of the social life in ancient China, and people of different professions were induced to reflect upon related monetary issues.
Scholars of the history of monetary thought in ancient China usually divide this thought into two stages, according to the emergence of paper money.2 The first stage, in which metal money prevailed, dates back to the Pre-Qin Period, lasting until the end of the Tang Dynasty (c. 6th century BC – 10th century). The second stage began with the Song Dynasty and ended with the Opium Wars of the Qing Dynasty (c. 11th century – 19th century).
Discussions over the trade-off between mother and son coins (“mother” and “son” respectively referred to metal coins of different sizes and weight; the purchasing power of each was in accordance with its weight) occurs with Shan Qi, a politician of the Spring and Autumn period, and reflected Guan Zhong’s theory of the weight of money. Jia Yi, a poet and political writer of the Western Han Dynasty, observed that debased money gradually drove undebased money out of the market, about two thousand years before “Gresham’s Law” was proposed. His “Expostulation against Private Coinage” was the earliest study of money in China, perhaps in the world as well, written prior to Aristotle’s discussion on the same topic in Politics. Sima Qian, a historian and writer of the Western Han Dynasty, held unconventional views on the origin of money, which became an important reference for later studies on the history of money. Sang Hongyang, an imperial secretary and finance minister of the Western Han Dynasty, was a forerunner in founding and consolidating a monetary system; advocating the state’s control over money and emphasizing the centralization of coinage.
In the Northern Song Dynasty, a scholar named Zhou Xing realized that the issue of convertible paper money required only a fractional reserve, an idea which was quite original at the time but did not result in credit creation via banks in China. Shen Kuo, a scientist and politician of the Northern Song Dynasty, proposed that the velocity of money is related to its quantity, about 600 years earlier than suggested by William Petty. Emperor Xiao Zong of Southern Song provided a clear analysis of the relationship between the quantity of paper money in circulation and its value, which was an early version the law of circulation of inconvertible paper money. Xin Qiji, a poet of the Southern Song Dynasty, while holding a favourable view on the usefulness of paper money nonetheless asserted the necessity of stabilizing its value – an unprecedented idea at that time. “Regulations on the Circulation of Bao Chao (Treasure Notes)” drafted by Ye Li, a politician and finance minister of the late Song Dynasty and early Yuan Dynasty, were the earliest regulations on the issue of inconvertible paper money in China and in the world. Having realized that it was possible to substitute metal money with paper money in circulation, Ye Ziqi, a Ming Dynasty scholar and philosopher, advocated the circulation of convertible paper money be based on its circulation laws. Wang Maoyin, a finance minister of the Qing Dynasty, was a Chinese scholar mentioned in Karl Marx’s Das Kapital for suggesting the issue of “token money” be backed by “real money”, a system based on convertible paper money.
Over several thousand years Chinese monetary policies were discussed in terms of how they might best facilitate the growth of the Chinese economy, which had long been one of the world’s most advanced economies. In the separate periods of metal and paper money, China’s debate focused on various monetary issues in different ways, and had profound influence on national progress and even the change of dynasties. Those considerations explain why some monetary theory in ancient China developed earlier than that in Western countries. It should also be noted that due to the differences in their class, social status and life experience, as well as their ideologies, approaches and points of view, these thinkers tended to vary in their academic capacities, understanding and experience of monetary matters and fields of specialization. The range, content and form of their studies were also diverse.
5. Chinese monetary thought and the structure of the state
According to Peng Xinwei (2007), a distinguished recent scholar of Chinese monetary history, there were two major elements in the monetary theories of ancient China. The first of these is the statist stance on money, which claims that money had no intrinsic value and that it was strictly used as government-issued tokens. Behind it lies the advocacy of a unified monetary system aimed at solving the problems caused by a disorderly monetary system at any time. A second key element was the quantity theory of money. Developed from the battle against inflation, it was viewed as a progressive theory at the time. Discussions on money in ancient China mainly focused on monetary policies, e.g. on the authority of coinage during the Han Dynasty, and on policies about paper money during the Song Dynasty. In comparison, theories on the nature and value of money were seen as supplementary comments to monetary policies.
Because the formulation of monetary theory is dependent on the development of a prior monetary economy, it seems reasonable to argue that the highpoint of monetary theory in ancient China was mostly before the Yuan Dynasty, when China was one of the world’s most developed economies, and before it was surpassed by Western countries. Similarly, Western monetary theories are highly valued and widely studied today because Western countries have become leading powers in the world’s economy.3 Developing countries wish to learn from Western economic and monetary systems, just as Japan learned extensively from China’s social systems during the Tang Dynasty.
The dominant view on the origin of money in ancient China was that money was created by the sage-kings. Shan Qi (524 B.C.), a 6th-century politician, believed that money was invented by one of the sage-kings in ancient times to protect refugees who had escaped from the flood. Therefore, instead of being the product of commodity circulation, money was regarded as reflecting the will of the ruler, its purpose being to measure the value of commodities. The earliest version of this type of theory was in Guan Zi (685 B.C.), an important theoretical work on monetary theories, who also indicated that there were links to two devastating floods during the reign of Yu and Tang. Seeing their people selling their sons and daughters to maintain a living after the floods, Yu and Tang invented money so that people could redeem their children with it. Shan Qi and Guan Zi were the earliest figures in the history of monetary thought in ancient China, whose influence extended over the dynasties. Their theories on the origin of money are regarded in China as canonical theories on this topic. There is also another reason why the theory of invention gained such popularity: these kings were canonized in Confucianist works as role models of virtue. Other theorists, such as Chao Cuo, a politician of the Western Han Dynasty, Lu Zhi, a government official of the Tang Dynasty, Li Gou, a scholar of the Northern Song Dynasty, and Qiu Jun, a government official of the Ming Dynasty, also held the same view.
Contrary to this view is the theory that money was created for convenience’s sake, a view held by a comparatively smaller number of scholars. Among them, the most well-known are Sima Qian, Luo Mi and Ye Shi. Sima Qian (104 B.C~91 B.C.) observed that money was the product of commodity exchange and its emergence and prevalence are inseparable from the circulation of commodities. This remarkable observation contrasted with the popular theory of invention. Luo Mi (1165 A.D.~1173 A.D.), a historian of the Southern Song Dynasty, pointed out that money was created to facilitate daily economic activities, and was only adopted by kings later to rule their countries. These views that held money was born out of necessity, showing independent influence from the theory of invention, were rare after Sima Qian. Ye Shi (1150 A.D.~1223 A.D.) who believed that money emerged in commodity exchanges and was related to business
activities. He explained that during the Pre-Qin Period, there was little need for money, as the country was divided into separate states with self-sufficient natural economies, but the demand for money increased significantly after the political unification of the Qin and Han Dynasties, when commodity exchanges occurred on a national scale.
6. Concluding remarks
That ancient China had rich monetary structure and experienced a wide range of debates on monetary theory seems hardly in doubt, but this has received little attention in Western research output. How much of these discussions might have travelled the silk road and influenced the evolution of later Western thought is hard to ascertain, but even the suggestion that this may have been in part the case is intriguing. And today, with rapidly maturing financial institutions in China this history of debate in current China seems all the more significant. Our hope is that later work to follow will more fully explore many of these broader issues.
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Guan Zi, 645 B.C.
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• Laidler, D. E. W., The Golden Age of the Quantity Theory, Princeton University Press, Princeton, N.J., 1991.
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• Laughlin, J. L., Money and Business Cycles, 1911.
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• Peng Xinwei. The History of China’s Money. Shanghai: Shanghai Renmin Press,2007.
• Qiu Jun. “Copper Coin and Paper Currency”, More about the Great Learning Derivative. 1487 A.D.
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1. We acknowledge financial support from the Ontario Research Fund (ORF-F3), IDRC, and the Centre for International Governance Innovation (CIGI), Waterloo Ontario.
2. See: Zhang Jiaxiang. The History of Monetary Thought in China. Wuhan: Hubei Renmin Press, 2001.
3. See Laidler (2004), Jevons (1899), Keynes (1972a,b,c,d), Laidler (1991), Ascheim and Taylor (1996), Laughlin (1911), Skaggs (1999), and Dimand (2002).
About the Authors
John Whalley, FRSC (Fellow of the Royal Society of Canada) is one of Canada’s most pre-eminent experts in the field of global economics. He is William G. Davies Professor of International Trade and Co-Director of the Centre for the Study of International Economic Relations, Department of Economics, University of Western Ontario (UWO, Canada). He is also a Distinguished Fellow at The Centre for International Governance Innovation (CIGI, Canada), Research Associate at the National Bureau of Economic Research in Cambridge, MA, Coordinator, Global Economy Group, CESifo, University of Munich, and a former Visiting Fellow at the Peter G. Person Institute for International Economics in Washington, D.C.
Yaguang Zhang is an Assistant Professor in the School of Economics at Peking University. He earned his PhD in Economics from Peking University in 2008 and his BA from Fuchow University in 2000. He teaches History of Economic Thoughts in Ancient China both at graduate and undergraduate levels in the School of Economics. His research interests include monetary theory in ancient China, finance policy in modern China and the relation between traditional culture and economic development.
Zheng Xueyi (1953-2009) was a historian of Chinese economic thought, a professor and PhD supervisor of School of Economics, Peking University. Professor Zheng served as president of the Association of Chinese Economic Thought History, Continuing Education Department of Peking University. He made a significant contribution to the research areas such as the History of Chinese Economic Thought, China’s Economic Management Thought, etc. His unique ideas and research results have significant influence on related subjects and areas.