Song dynasty jiaozi
In 1024 the Song dynasty's central government took over the issuance of paper currency from a private merchant guild in Sichuan and began printing the jiaozi — the first true state-issued banknote in recorded history. Earlier Tang flying money had been a private receipt for deposited copper. The jiaozi was different: the state itself promised redemption, the state itself controlled the supply, and the state itself bore the consequences when too many notes were printed. By the late 1100s, the supply had been over-issued and the jiaozi traded at roughly 10 percent of face. The pattern that began in Sichuan in 1024 has run, with regional variations, in every fiat currency since.
The Song state initially issued the jiaozi against a copper reserve, with a promised three-year expiration to force redemption. Within decades the expiration was waived and the reserve requirement was quietly relaxed. The Song would issue four successive paper currencies over the following 200 years, each replacing the previous one after over-issuance had destroyed its value. The Yuan dynasty inherited the practice and Marco Polo wrote about it. Europe took 600 years to copy it.
03 · Paper Money
Paper money is a piece of paper that says, on its face, that it can be exchanged for something else. That something else — usually metal — stays in a vault. The paper circulates, the metal doesn't. The entire economy becomes a bet on whether the issuer can still deliver the metal. For most of paper's history, they couldn't.
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