JiaoZi and Iron Standard – Examining world’s first documented paper money system from China with lenses of Austrian economics

Governments have persistently tried their best to promote, encourage, and expand the circulation of bank and government paper, and to discourage the people's use of gold itself. - Murray Rothbard

As the cliché often goes, history doesn’t repeat itself but it does rhyme. But in case of the central banking and fiat money system, a peculiar development of a paper money system called JiaoZi (Chinese: 交子; pinyin: jiāozǐ) emerged in the 10th century of Middle Kingdom (China)  that lasted almost 300 years, and its similarity to the history of Federal Reserve System up until today, certainly deserves the repetition of that old saying, and gives also us some clues to what could eventually happen to Federal Reserve System.

“Iron Standard” and Era of the Private JiaoZi (960-1004)

It is year 960, after years of upheaval of the Five Dynasties and Ten Kingdoms period, the once almighty Tang Dynasty was crumbling. A general called Zhao Kuangyin taking advantage of the trust from emperor of Later Zhou state, staged a coup and declared him son of the heaven. An imperial title that legitimized him a future ruler of the Middle Kingdom.

Zhao Kuangyin - Song Taizu

Zhao Kuangyin – Song Taizu

But his ambition went beyond that, he believed that in order to avoid the destiny of Tang Dynasty, an even more centralized government is needed. He did not wait any minute of starting his ambitious reforms, which include weakening the power of cantons, fully centralizing military powers, nationalizing tea, alcohol and salt businesses, etc. And most interestingly for this study he also confiscated all gold and silver, forbade usages of copper coins and only allows iron coins in circulation in SiChuan area where he initially controlled (at that time he is yet to take over the other areas of Middle Kingdom). This peculiar “Iron Standard” created an unintended consequence that this central planner had never thought of: a world’s first documented paper money system.

To understand how it happened, it is important to understand the quality of iron. Earth is full of iron on its surface, it is relatively easy to produce iron than copper, needless to say than silver and gold. In fact, it was said that 10 iron coins were worth only 1 copper coin [1]“川峡铁钱十,直铜钱一”- (《宋史》卷180《食货志》. Also it was extremely heavy, 1 Guan or 1000 Wen (Chinese traditional units of money, 1 Wen is one coin, 1000 Wen equals 1 Guan. Usually 1000 coins are linked together via central holes of coins via a string) weighs around 4 kilograms; 1 Pi of Silk cloth (Pi is a Chinese traditional unit for cloths, roughly 30-40 meters long) would require 20 Guan or 80 kilograms of iron coins.

Iron Coins from Song Dynasty

Iron Coins from Song Dynasty

This extreme inconvenience gave local entrepreneurs a great problem to solve. Someone came up a system called JiaoZi, a then slang basically meant certificate, effectively an ‘Iron Certificate’. People would deposit their iron coins to these JiaoZiPu (JiaoZi Shop) and take some certificates with value of iron coins redeemable and their names on it. In turn, the shop would take a deposit fee for profit. Voilà, a deposit banking system. The system went “viral”, many merchants followed and opened similar businesses. It was also said that, most of the shops try to keep the credibility high, and that free market based money system (with the absent of gold and silver! you gotta admire entrepreneurship!) lasted at least 40 years.

JiaoZi Reconstructed Image

Piece of JiaoZi Printing Plated discovered.

Piece of JiaoZi Printing Plated discovered.

A tradition also created from this time is that these JiaoZi banks would issue new versions every two years called one Jie. The reasons were simply that the paper quality then was not good and they didn’t last very long, and also it is to prevent counterfeiters from having enough time to figure out the secrete code of each version of JiaoZi from different merchants.

It is very much like the “Free Banking” Era 1837–1862 in United States, with a twist that the specie which “bank notes”/JiaoZi hold against is not gold and silver but iron.

Privately issued note in "Free Banking" Era of US

Privately issued note in “Free Banking” Era of US

But as you may have expected, with central planners lurching around, life is not gonna be that simple for these fluky free bankers.

Cartelization of JiaoZi Banks and Monopoly of Official JiaoZi (1004-1068)

During the period of private JiaoZi, some merchants discovered that since not all people would redeem their iron coins at the same time, they could secretly use some of their iron coins reserves as loans or for investments without telling anybody. But from time to time, these merchants went bust and couldn’t redeem all the iron coins they kept. This lead to increasing lawsuits and complains among residents.

The government of course, was ready to “help”. During 1004-1007 aka JingDe Period of Song Dynasty, the state governor of SiChuan [2]益州/YiZhou was its name at that time ZhangYong decided to regulate the JiaoZi business, and granted some 16 rich merchants headed by WangChangYi licenses of running JiaoZi business[3]李心传《建炎以来朝野杂记》甲集卷16《四川钱引》说:“四川钱引,旧成(都)豪民十六户主之。”.

It was only a preparation, in 1023 aka TianShenYuanNian period of Song Dynasty, new Emperor Song RenZong officially setup ministry of JiaoZi. He declared that only this ministry could print Official JiaoZi, and counterfeiting of the JiaoZi was considered a felony. Although lacking historical text, an Austrian economics believer could easily imagine that a law similar to legal tender might have been in place to assure that the businesses would have to be ready to accept the Official JiaoZi  anytime. Thus government now holds the monopoly power of the monetary system.

At the same time, an interesting fact was that, by issuing first version of 1,256,340 Guan of Official JIaoZi[4] … Continue reading, the iron coins reserve used to back the issuance were around 360 thousand Guan[5]《宋史》卷181《食货志》,《文献通考》卷9. That boiled down to a 28% official reserve ratio.

This certalization process, much akin to the Federal Reserve Act in 1913, favored some of the big banks for staying in the business, and also made reserve ratio an official instrument for future monetary expansion purpose.

Federal Reserve - 1913 US newspaper clipping

Federal Reserve – 1913 US newspaper clipping

Deficit Spending, Nationalizations and Devaluation of JiaoZi (1068-1107)

The relative stable value of JiaoZi did not last too long. Central government of Song Dynasty kept growing; redundancies in bureaucracies and military expenses were among the main reasons. Here is snapshots of government balances in those days[6] 熙宁变法 | https://zh.wikipedia.org/zh-cn/%E7%86%99%E5%AF%A7%E8%AE%8A%E6%B3%95 :

Government Balances of Song Dynasty
Year Tax Revenue Government Expenditures
1021 150,850,100 126,775,200
1048 103,596,400 89,383,700
1049 126,251,964 126,251,964
1065 116,138,405 131,864,452

By the time of 1065, the government had already been running with big deficits.

In 1068, Song ShenZong [7]his temple name literally means Divine Ancestor took over the reign of Song Dynasty, and entrusted his chancellor WangAnShi for making reforms to balance the budget. Some interesting measures of the WangAnShi reforms in area of economics are to:

  1. Provide government guaranteed of loan to farmers during growing season of grains, curb usury practices of local “loan sharks”.
  2. Increase local tax for building water conservancy projects.
  3. Set up ministry of price for controlling price within a city and regulating the big evil merchants.
  4. Set up ministry for arbitraging price differences of cities, in the name of more efficient use of tax revenue (E.g. buying supply for palace from cheaper city using tax revenue from expensive city) and regulate arbitragers who were blamed of manipulating prices.
  5. “Tax the rich”. Introduce fairness to the process of levying land tax.
WangAnShi - The Chinese FDR of 11th century?

WangAnShi – The Chinese FDR of 11th century?

What a progressive man! But the economic reforms were rapidly failing one after another, main stream Chinese historians’ view on this is usually that of the establishments who opposed the “New Deals” are to blame. But from Austrian economics point of view, it is simply that the system itself wouldn’t have worked. And further more, most likely due to local state revenue were deteriorating, and now that government also holds the issuing power of JiaoZi, the devaluation process began.

5 years into reforms, from 1073, valid period of each issuance of JiaoZi are extended from 2 years to 4 years while still being issued every 2 years. This effectively doubled the money supply. In 1094, the amount of issuance of JiaoZi are increased to 1,406,340 Guan[8]《文献通考》卷9,《蜀中广记》卷67引《楮币谱》。. In 1098, 1,886,340 Guan[9]蜀中广记》卷67引《楮币谱》。. Taking into account the doubled valid period, the money supply had been increased 3 fold since the beginning of Official JiaoZi, which was 1,256,340 Guan. In order to keep the face value of 1 Guan JIaoZi(redeemable for 1000 Iron Coins) at each Issuance, it was said that sometimes 4 old Guan JIaoZi can only be replaced with 1 new Guan JiaoZi. By the end of 1107, money supply had been 42 folded since the beginning[10]《建炎以来朝野杂记》甲集卷16《四川钱引》。.

Collapsing of the “Iron Standard” and Fiat Money QianYin (1107-1279)

In 1107, under Song HuiZong, JiaoZi was renamed to QianYin, money supply was increased to more than 20 millions Min, a new unit that was equivalent to Guan, per issuance. And more importantly there was no single iron coin to back the issuing of new money. The final barrier for perpetual inflation was removed, “Iron Standard” effectively ended, and QianYin became the fiat money version of JIaoZi. Few years later, 1 Min, with a face value of 1000 iron coins, could only redeem around a dozen of actual iron coins [11]《宋史∙食货志》接着说:大观中,不蓄本钱而增造无艺,至引一缗当钱十数. This is the Chinese version of “Nixon shock”[12]https://en.wikipedia.org/wiki/Nixon_Shock in the 12th century.

Nixon Shock

Nixon Shock

Coincidentally, 20 years later, Song Dynasty was defeated by the northern Jurchen people[13]An ethnic whose custom and language is closed related to Khitan people. Also interestingly, Khitan is how in Russian-related languages how Chinese people are called. whose settlement was known as the Jin Dynasty. Thus historically, Song Dynasty since then was called the Southern Song, and before was called Northern Song.

In 1279, QianYin finally died out all together with the demise of Song Dynasty. The first paper money system lasted from 960 to 1279, for almost 300 years.

But the power of paper money has since then been luring world’s governments. In 1661, Johan Palmstruch issued the first regular paper money in the West, under royal charter from the Kingdom of Sweden, through a new institution, the Bank of Stockholm.

The first paper money in Europe (1666).

The first paper money in Europe (1666).

Now we are living in the era of US Dollar as world’s reserve currency, but the history of JiaoZi reminds us how vulnerable a fiat money system is to the will of the government. A hard currency standard is always an important check against the whims of government, and in case of JiaoZi, the hard currency was not even precious metal but the humble iron.


1 “川峡铁钱十,直铜钱一”- (《宋史》卷180《食货志》
2 益州/YiZhou was its name at that time
3 李心传《建炎以来朝野杂记》甲集卷16《四川钱引》说:“四川钱引,旧成(都)豪民十六户主之。”
4 宋史》卷181《食货志》,《文献通考》卷9,《山堂群书考索》后集卷62,《蜀中广记》卷67引费著《楮币谱》等书记载相同,唯有《宋朝事实》卷15《财用》载第[一]界为3,884,600贯,今不取。
5 《宋史》卷181《食货志》,《文献通考》卷9
6 熙宁变法 | https://zh.wikipedia.org/zh-cn/%E7%86%99%E5%AF%A7%E8%AE%8A%E6%B3%95
7 his temple name literally means Divine Ancestor
8 《文献通考》卷9,《蜀中广记》卷67引《楮币谱》。
9 蜀中广记》卷67引《楮币谱》。
10 《建炎以来朝野杂记》甲集卷16《四川钱引》。
11 《宋史∙食货志》接着说:大观中,不蓄本钱而增造无艺,至引一缗当钱十数
12 https://en.wikipedia.org/wiki/Nixon_Shock
13 An ethnic whose custom and language is closed related to Khitan people. Also interestingly, Khitan is how in Russian-related languages how Chinese people are called.