Imagine walking to the market with your weekly shopping budget. Now imagine that budget weighs eight pounds and jingles with every step. That was the reality for Chinese merchants in the 10th century, who lugged around strings of copper coins heavy enough to throw out your back.

The solution they invented—paper money—would revolutionize commerce forever. But the Song Dynasty also stumbled into humanity's first experiment with printing more money when you run out. Spoiler alert: it didn't go well. The economic lessons they learned the hard way are ones we're still relearning today.

Chinese copper coins had a hole in the center—not for decoration, but for threading them onto strings. A standard string held 1,000 coins and weighed roughly eight pounds. Buying a horse might require you to bring fifty pounds of metal. Purchasing a house meant you essentially needed a wheelbarrow and possibly a security detail.

The Song Dynasty (960-1279 CE) faced a peculiar problem: their economy was too successful. Trade was booming, cities were growing, and there simply wasn't enough copper in the empire to mint the coins everyone needed. Some regions resorted to iron coins, which were even heavier—the same 1,000-coin string now weighed over twenty pounds. Merchants in Sichuan province spent more energy hauling money than selling goods.

Necessity, as usual, mothered invention. Wealthy merchants began leaving their heavy coin hoards with trusted deposit shops and carrying paper receipts instead. These receipts promised the bearer could collect the actual coins whenever they wanted. It was like a coat check, but for your life savings. And surprisingly, people started accepting the receipts themselves as payment rather than bothering to collect the coins at all.

Takeaway

When physical constraints make the standard solution impractical, people don't suffer indefinitely—they innovate around the obstacle, often creating something more transformative than a simple fix.

The Chinese called these early receipts jiaozi, or "exchange notes," though some nicknamed them "flying money" because they could travel so much faster than coins. Initially, private merchant houses issued them, each note backed by the specific coins sitting in a specific vault. It worked beautifully—as long as everyone stayed honest.

But some merchants discovered that if they issued more receipts than they actually had coins, nobody noticed as long as everyone didn't try to collect at once. Sound familiar? Several houses collapsed when their IOUs exceeded their reserves, leaving customers with worthless paper. The Song government saw both a problem and an opportunity.

In 1024 CE, the government took over paper money production, creating the world's first state-issued currency. They printed notes on special paper made from mulberry bark, stamped them with official seals, and decorated them with intricate designs to prevent counterfeiting. Each note had an expiration date—usually three years—after which you'd exchange it for fresh currency. The government promised to back the notes with coin reserves and strictly limited how many could circulate. For about a century, it worked remarkably well.

Takeaway

Currency is fundamentally a shared agreement about trust—paper only becomes money when everyone believes the promise printed on it, and that belief requires either earned reputation or enforced reliability.

The Song Dynasty faced expensive problems: invading Jurchen armies from the north, massive military campaigns, and the ongoing costs of running a sophisticated empire. Previous dynasties facing such pressures had raised taxes or debased their coins by mixing in cheaper metals. But the Song had a shinier option—they could simply print more notes.

At first, they exercised restraint. Then restraint became inconvenient. By the late 11th century, the amount of paper money in circulation had multiplied several times over while the coin reserves backing it stayed flat. Prices began creeping upward. The government, needing even more money, printed more notes. Prices climbed faster. Within decades, jiaozi had lost most of its value against actual coins.

The Southern Song Dynasty repeated the experiment with even more enthusiasm after losing northern China to invaders. They printed so much money that by the 1200s, their paper currency was worth roughly 1% of its face value. People wallpapered their homes with it—literally. The dynasty that invented paper money collapsed partly under the weight of its own printing presses. The Mongol successors took note, tried paper money themselves, and promptly created their own inflation crisis.

Takeaway

The temptation to solve immediate problems by creating money from nothing has seduced governments for a thousand years—the Song Dynasty simply discovered this trap first.

The Song Dynasty gave humanity one of its most powerful financial tools and simultaneously demonstrated its most dangerous failure mode. They proved that paper could replace metal, that trust could substitute for weight, and that governments controlling the money supply would inevitably face the temptation to abuse it.

Every modern conversation about inflation, currency reserves, and monetary policy echoes those 10th-century merchants deciding whether to trust a piece of mulberry bark. The Chinese figured out paper money. They also figured out—the hard way—what happens when you forget that money is a promise, not a magic trick.