A Venetian merchant described a system in which scraps of bark stamped with ink replaced gold. The empire that built this system proved that paper could be money — and then proved that it could cease to be.
Marco Polo arrived in the realm of Kublai Khan in the 1270s, and what he saw stunned him: officials took the inner bark of the mulberry tree, turned it into sheets, stamped them with seals — and those sheets became money. “With these pieces of paper he [the Great Khan] orders all payments to be made,” the traveler wrote, with that particular astonishment that comes when someone sees a thing working and cannot understand why it works. For 13th-century Europe, where a coin’s value was determined by the weight of silver in it, the idea of pure fiat — money containing no precious metal of its own — sounded almost like a conjuring trick. Polo described the issuing procedure in detail: black ink, red seals, the solemnity of the process. But he described the outer workings of the mechanism, as though a man seeing a clock for the first time gave a detailed account of its face and hands while missing the spring.
Behind those “pieces of paper” stood a financial machine the Mongols had not invented from scratch. Chinese states had been experimenting with paper money long before Genghis Khan was born on the steppe. The Northern Song knew jiaochao — promissory notes that became a de facto currency in Sichuan Province. The Southern Song issued huizi. These early forms of paper money were tied to particular regions, backed by reserves of metal or silk, and their history was a chain of successes and inflationary disasters, each teaching the next government something new. The Yuan under Kublai Khan did not begin with a blank sheet; it inherited both experience and mistakes. The difference was scale: for the first time, paper money was meant to work across a continent — from Korea to Persia, among dozens of peoples speaking different languages and accustomed to utterly different forms of payment.
The technology behind Yuan banknotes deserves a slow look in its own right. The raw material was the inner bark of the mulberry — the tree that was everywhere in China thanks to silk cultivation. The bark was soaked, beaten into a fibrous pulp, formed into sheets. The result was thick, dark-toned paper, distinctly different to the touch from ordinary writing paper. Onto this base went an intricate print: the denomination, serial markings, warnings of punishment for counterfeiting. The process was completed by state seals — red impressions without which the sheet remained nothing but bark. Worn-out notes were supposed to be surrendered to the treasury, where they were destroyed and replaced with new ones — less a 3% fee. The three-percent charge for exchanging worn banknotes for fresh ones gave the state a steady trickle of revenue while also maintaining the physical quality of the money supply.
The first major issue was the Zhongtong chao, introduced in 1260, the year Kublai Khan established himself as Great Khan. Denominations ran from 10 wen to 2 guan, with a specific silver peg: 2 guan equaled 1 tael of silver. Some 65 state warehouses across the empire held silver reserves that made redemption possible. The system looked coherent: paper was tied to metal, metal sat in storage, exchange was possible — even if there was a fee. At the same time, the state methodically withdrew old local banknotes — Song jiaochao and huizi — along with copper coins, replacing them with a single currency. Taxes were accepted exclusively in paper money. This was the key lever: if you had to pay your taxes in paper, you needed paper, which meant you accepted it in trade. The state created demand for its own currency through fiscal coercion.
There is one thing about the Yuan system that gets me: its creators, without knowing the word “fiat,” built a classic fiat model. Chao were not “pieces of paper backed by gold” in the sense understood by someone familiar with the 19th-century gold standard. Silver backing existed, but it served as an anchor of trust rather than literal coverage for every note. The state upheld the value of the chao through a combination of measures: mandatory acceptance, tax demand, restrictions on the use of other means of payment, and the possibility of exchange for silver. None of these measures alone made paper into money; the bundle did.
At the same time, the image of a unified monetary space from Beijing to Bukhara is a simplification. In different regions of the empire, silver ingots, copper coins, cloth, and grain continued to circulate. The extent to which the khan’s banknotes were actually accepted depended on the distance from the capital, the density of trade routes, the zeal of local officials and, bluntly, whether a Mongol garrison stood behind the tax collector. In the southeastern seaports, where international trade flowed, silver remained the customary means of payment. In the Yunnan interior, cowrie shells were used. The Yuan currency system was more a gradient than a monolith: the closer to the center of power, the harder the paper; the farther away, the more it competed with metal and barter.
For the first decade and a half — from 1260 to 1276 — the system operated with striking stability. A strict link to silver reserves held the exchange rate in place. The volume of issuance was controlled. The state behaved like a disciplined issuer, and the market answered with trust. This was the period of conquest of the Southern Song, and paper money, in essence, financed the unification of China.
The turning point came after 1277. The wars against the Southern Song demanded colossal spending, and the government began drawing directly on the silver in its reserve warehouses for military needs. The anchor holding the paper in place grew lighter. In 1287, the first Zhiyuan chao appeared — a new issue exchanged at a rate of 1 Zhiyuan chao for 5 Zhongtong chao. This was a redenomination that concealed an admission: the old series had lost part of its purchasing power. The state tried to reboot the system while preserving its architecture: new denominations, the same principles of mandatory acceptance, the same warehouses — but with a weakened metallic foundation.
In 1309, it issued the Zhida yinchaо — banknotes denominated directly in silver taels — an attempt to restore the feeling of “real” money tied to the weight of metal. Then, from 1311 to 1351, the second Zhiyuan chao circulated. Each new issue was an attempt at stabilization, and each testified that the previous one had failed to stabilize anything. The mechanism of seigniorage — extracting revenue from the very right to print money — became a drug for the Yuan court: military expenses rose, the tax base shrank, and the printing press offered instant liquidity without the need to collect taxes from rebellious provinces.
Econometric research (the work of Guan et al.) makes it possible to measure what exactly drove the issuance wheel faster. The main driver was not imperial grants or court extravagance — statistically, their effect on the volume issued was insignificant. The real accelerator was multi-province rebellions: in the years of such uprisings, issuance nearly doubled — by 84–103% (the estimates of Guan, Palma, and Wu under different model specifications), while each newly involved province added another 42–52%. The logic is clear and grim: rebellion → military expenditure → money printing → depreciation → growing discontent → another rebellion. A feedback loop from which there was no escape within the monetary system itself.
By the middle of the 14th century, the Yuan economy had entered a zone where the monetary system no longer performed its basic function. In 1350, the government made one last major attempt — it issued the Zhizheng chao, exchanged at a rate of 1 to 2 against the old banknotes. It was another redenomination, and it failed for the same reason the previous ones had failed: the new paper was printed by the same state that had already lost the ability to control its own finances.
By 1355–1356, the volume of issuance had reached 60 million ding (with 1 ding equal to 50 taels or 50 guan). Prices rose hundreds and thousands of times over: by 400 times in silver terms, by 250 times in grain terms, and by as much as 50,000 times according to the denominations of Yuan law. Paper money turned into what it had physically always been: scraps of bark with ink on them. The economy partly returned to barter. Peasants, craftsmen, merchants — everyone who could shifted to silver, grain, cloth, any commodity with a use value of its own. The state currency existed formally, but the market had turned its back on it.
It is tempting to construct a simple story: they printed too much money → inflation → the collapse of the dynasty. But reality was more complicated. The monetary crisis was one thread in a tangle that included catastrophic Yellow River floods, plague epidemics, years of rebellion — above all the Red Turban movement — the fiscal collapse of provincial administration, and ethnic conflicts within the ruling elite. Inflation did not “overthrow the Yuan” — it was both a symptom and an amplifier of a disintegration moving through several channels. A state unable to suppress rebellions printed money; the depreciation of money undermined the economy from which the state was trying to draw resources to suppress those rebellions. By 1368, when Zhu Yuanzhang founded the Ming dynasty, Yuan chao were already a dead currency — not because someone had formally abolished them, but because not a single seller in the market would have agreed to trade a handful of rice for them.
To me, the most instructive thing about the Yuan story is how long the system worked. For more than thirty years, from 1260 through the early 1290s, the paper money of a vast multiethnic empire retained its purchasing power. An almost free physical medium — tree bark — functioned as a universal equivalent of value across a territory that mounted couriers crossed in weeks. This was possible for exactly as long as the state fulfilled its side of the unspoken contract: collected taxes in its own currency, maintained reserves, limited issuance, punished counterfeiters, exchanged worn-out notes.
The paradox of paper money is that its cheapness is both its strength and its vulnerability. A silver coin is difficult and costly to mint, but that is precisely why a government cannot print it in arbitrary quantities. A paper note is easy to print — and that is precisely why the only thing keeping it from becoming wastepaper is the discipline of the issuer. The Yuan court lost that discipline not out of greed or stupidity, but under pressure from circumstances it could not handle: wars, natural disasters, the disintegration of the administrative apparatus. The printing press was the last instrument still obeying orders from the capital when the provinces had already ceased to obey.
The Ming dynasty, upon coming to power, tried to revive paper money — issuing its own Da Ming baochao. But the memory of Yuan inflation proved stubborn: Ming banknotes also depreciated, and by the 15th century China had effectively shifted to a silver standard that endured for centuries. Europe tried paper money only in the 17th century: in 1661, Johan Palmstruch’s Stockholms Banco — Sweden’s first bank — issued the first European banknotes, and by 1664 the kingdom’s Council of State demanded that the credit notes be withdrawn: the bank had issued markedly more than it could cover in coin. John Law’s bank in France, the assignats of the Revolution — each time the story rhymed with the Yuan: at first it works, then they print more, then more still, then the paper burns in stoves because that is more useful. The Yuan was the first empire to go through this entire cycle from beginning to end — and to leave behind empirical proof of what happens when a seal on paper no longer means that the state can meet its obligations.