5 — Paper Money and Credit in Early Trade (7th – 15th Century)

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Part C — Paper Money and the Rise of Banking

The emergence of paper money and early credit systems represents a significant evolution in monetary history, transitioning from tangible metal coins to more abstract, representative forms of value.

Economic Context

  • Expansion of long-distance trade, particularly along the Silk Road, created a need for more convenient and portable means of payment than coins.
  • Merchants and governments sought ways to reduce the cost and risk associated with transporting large quantities of metal currency.

Origins and Development of Paper Money

  • China:
    • During the Tang Dynasty (7th century), merchants began using promissory notes and receipts as a form of money.
    • By the Song Dynasty (10th–13th centuries), the government issued official paper notes (jiaozi) backed initially by precious metals and later by state authority.
  • Islamic world:
    • Bills of exchange (sakk) facilitated trade across vast distances.
    • Allowed merchants to deposit funds in one city and withdraw in another, reducing the need for transporting coinage.
  • Europe:
    • Italian city-states (e.g., Venice, Genoa) developed bills of exchange in the 12th century, enabling merchants to settle accounts across regions without moving physical money.

Functions of Paper Money and Credit

  • Medium of exchange: Enabled merchants to conduct trade without transporting bulky coins.
  • Unit of account: Provided standardised denominations for complex transactions.
  • Credit creation: Early promissory notes allowed deferred payment, laying the foundation for modern banking.
  • Risk reduction: Decreased theft and loss associated with carrying coins over long distances.

Social and Institutional Impacts

  • Increased economic efficiency and trade volume across regions.
  • Strengthened merchant networks and international trade.
  • Introduced the concept of trust in monetary instruments, with value guaranteed by institutions or authorities rather than intrinsic metal content.
  • Influenced the later development of centralised banking systems in Europe.

Limitations and Challenges

  • Reliance on institutional credibility: Trust in paper money was essential.
  • Risk of over-issuance: Excessive notes could lead to inflation or loss of public confidence.
  • Acceptance was initially regional, slowing global adoption.

Significance

  • Marked the transition from tangible commodity money to representative money.
  • Enabled credit-based trade, which expanded commercial networks and economic complexity.
  • Established foundational principles for modern banking, financial instruments, and monetary policy.

References

  • Von Glahn, R. (2016). The Economic History of China. Cambridge: Cambridge University Press.
  • Goetzmann, W. N. (2016). Money Changes Everything: How Finance Made Civilization Possible. Princeton: Princeton University Press.
  • Davies, G. (2016). A History of Money. Cardiff: University of Wales Press.
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