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.