Academic journal article Independent Review

How Paper Money Led to the Mongol Conquest: Money and the Collapse of Song China

Academic journal article Independent Review

How Paper Money Led to the Mongol Conquest: Money and the Collapse of Song China

Article excerpt

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.

--Ernest Hemingway, "Notes on the Next War"

China's Song dynasty (960-1279) is fascinating for three reasons. First, the Song is one of history's wealthiest Golden Ages, inventing military gunpowder, movable print, industrial textiles, windmills, and canal-faring paddleboats--innovations fueled by the mass production and commercialization of rice. Second, as a powerful empire succumbing to the Mongols, the Song added to the resources the Mongols subsequently deployed to conquer most of Eurasia. Third, among the most significant inventions credited to the era is one many of us carry every day: paper money.

The Song is also fascinating because of its fate: it collapsed not once, but twice. Both collapses occurred in a strikingly similar pattern: propagation of populist and dirigiste policies that burdened the private sector, followed closely by inflationary deficit financing, hyperinflation, war in alliance with inferior neighbors, and, finally, conquest by these seemingly far less powerful allies. That such a similar pattern occurred twice, on such similar timelines, begs a search for underlying economic patterns.

Generalissimo Chiang Kai-Shek once compared the invading Japanese to a disease of the skin but the Communists to a disease of the heart (Hu 2006). In this essay, I argue that China's Song dynasty was destroyed not by the skin disease of military misadventure but rather by the heart disease of an economically predatory government. I trace out the critical role played by one of the most significant technological developments of the era: fiat currency.

I argue that because inflationary deficit finance allowed the Song to obtain revenue regardless of the private sector's well-being, in a process analogous to the natural-resource curse (Garaibeh 1987; Luciani 1987; Chaudhry 1994; Karl 1997; Ascher 1999; Moore 2001, 2004; Sachs and Warner 2001) and to the "aid curse" (Leeson 2008), these policies weakened the natural symbiosis between public administration and the private sector. In effect, by papering over the short-term fiscal harm of economically destructive policies, fiat money creation allowed those policies to survive long enough to "metastasize." This greater freedom of bureaucratic action allowed the entrenchment of policies that harassed the private economy via attacks on the property rights on which it depended (see Acemoglu, Johnson, Robinson 2001, 1369, for a survey of literature linking security of property rights and economic growth), while permitting increased fiscal costs that became debilitating during episodes of monetary retrenchment.

This fiat-money-enabled economic stagnation and fiscal deadweight then led to the proximate causes of the Song's decline: high inflation, widespread corruption, a series of aggressive wars with neighbors, and alienation of local landlords, merchants, and producers. Combined, these results facilitated what would otherwise have been an unlikely conquest by much smaller neighbors.

Explanations of the Song collapses today tend to focus on noneconomic and typically proximate causes: military reversals (Woolf 2008), gradual resource depletion (Pomeranz 2000), overpopulation (Sng 2010), and even cultural aggregates such as general attitudes toward innovation (Mokyr 1990; Landes 2006). A key challenge to such arguments, beyond the military mismatch, is that both declines saw sharp inflections surrounding economic policy events, identifiable to the decade or even the year--too sharp for population pressures, gradual resource depletion, or especially cultural views of innovation. Kent Deng sums up the modern view: "The Song paradox of advanced industry and commerce coinciding with pathetic national defense has never failed to provoke debate" (2013, 4). …

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