Paper money

Paper money emerged because Sichuan's economy had outgrown its currency. The region used heavy iron coins rather than copper—so heavy that a thousand coins weighed over three kilograms. Merchants traveling with serious money needed ox-carts. The solution arose not from government decree but from merchant necessity: deposit receipts that could be traded instead of the coins themselves.

The predecessor was 'flying cash' (feiqian), developed during the Tang dynasty (618-907 CE). These were government-issued certificates allowing merchants to deposit money in the capital and redeem it in provincial cities, eliminating the risk and burden of transporting coins. But flying cash wasn't true currency—it couldn't circulate between individuals and wasn't available to the general public. It was a bank draft, not money.

The jiaozi transformed this concept. Around the 10th century in Sichuan, private merchant companies began issuing paper notes redeemable for deposited coins. These notes could be traded between individuals—true paper currency. By 1005, sixteen of the largest Sichuanese merchant companies had founded the Paper Note Bank (Jiaozi hu), standardizing banknotes and establishing the infrastructure for widespread use.

But private banking proved unstable. Merchant companies failed; depositors lost their money; counterfeiters tested the system. The Song government nationalized paper currency in 1023, founding the Jiaozi wu (交子務) to manage production. The first series of standard government notes issued in 1024 marks the beginning of state-backed paper currency—a development that wouldn't reach Europe for another six centuries.

The technology required sophisticated anti-counterfeiting measures. Notes bore multiple banknote seals in different colors, printed at factories in four separate cities using distinct woodblocks. Special inks, embedded fibers, and printed warnings of execution for counterfeiters all attempted to secure the system. A printer caught producing 2,600 fake notes in 1183 was put to death.

Yet paper money contained inherent instability. Unlike metal coins with intrinsic value, paper's worth depended entirely on trust in the issuing authority. When the Song government printed more notes than it could redeem, inflation followed. Emperor Huizong replaced the jiaozi with a new currency called qianyin in 1105, but inflation continued. A nominal unit of currency eventually exchanged for only a handful of coins.

The experiment spread through subsequent dynasties. The Mongol Yuan dynasty issued paper money throughout their empire—Marco Polo described it with wonder. The Ming initially used paper currency before returning to silver. Each iteration taught lessons about monetary policy that Western economies would later rediscover.

Sweden issued Europe's first paper currency in the 1660s, over six centuries after Sichuan merchants solved their iron-coin problem. The Bank of England came later still. Today, most money exists only as digital entries—the logical conclusion of replacing physical value with recorded promise. The jiaozi's descendants include everything from Federal Reserve notes to cryptocurrency, all tracing back to Sichuan merchants tired of carrying iron coins.