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From minting coins to controlling commodities, runaway inflation in ancient China laid bare the limits of imperial power

By Zhang Yue Updated May.1

Coins known as wuzhu dating from the Han Dynasty, are exhibited at the Financial Culture Museum at the Fuzhou Historic and Cultural Street, Fuzhou, Fujian Province, March 1, 2022

Inflation is a big concern for consumers and policymakers in major economies today. The US consumer price index – a major indicator of inflation – rose by 6.8 percent in 2021 to a 40-year high, and shows no sign of abating. In China, although the consumer price index only saw a mild increase of 0.9 percent in 2021, the producer price index increased by 8.1 percent. Rising costs for manufacturers will likely be passed on to consumers in the future.  

Loss of wealth due to inflation is not new. There are several causes of inflation, mainly if there is an imbalance between supply and demand or excessive money supply by the government. This time, both are causing inflation in the US. The disruption in the global supply chain since the pandemic and the Russia-Ukraine war have been pushing up prices of both commodity and consumer products on the international market. It has been compounded by the Fed’s quantitative easing since the 2008 global financial crisis, a move partially motivated by seigniorage revenues, or profits the government makes from issuing currency. Economic theory calls this “inflation tax,” where the holders of currency see the value of it decline as the government prints more money.
Monetary Trials
Similar lessons can be learned from the ancient Chinese history.  

In the 14 years of the short-lived Xin Dynasty (9-23 CE), its founder and only emperor Wang Mang carried out four currency reforms before and after he usurped the throne from his aunt, Wang Zhengjun, the empress of the Western Han. He first introduced new copper coins to replace the ones used for 110 years, called wuzhu, or “five zhu,” an old imperial unit of weight. The wuzhu weighed around 4 grams. Although the new coin weighed about 2.4 times its predecessor, the official exchange rate was set at 1 to 50. One new coin was worth 50 wuzhu. He later ordered two more new coins to be minted with much larger face values, 500 and 5,000. The new coin system was complicated, with many categories and materials for each coin issued. Hyperinflation followed, and the market fell into chaos. Many people resorted to minting and using wuzhu coins at their own risk. As recorded in the Book of Han, the historical records of the Western Han and Xin dynasties, the reform bankrupted families, farmers and businesses, as well as threatened food supplies. In the end, Wang Mang lost support. The Xin dynasty fell to rebellions led by famine-stricken farmers and opportunistic warlords. The new dynasty, the Eastern Han, restored the wuzhu coin, and the economy stabilized once again.  

Wang Mang’s reform was not economically motivated. It was part of his ideal yet unrealistic plan to restore the order of the ancient Western Zhou Dynasty, which ruled Central China between the 11th and 8th centuries BCE. Confucius advocated for restoring the ideas and values represented in The Rites of Zhou, a book that detailed the dynasty’s political system and ceremonial rites. As a champion of classical Confucianism, Wang Mang wanted to realize that model for the Xin Dynasty. For example, tortoise shell and cloth were used to make coins in Wang’s reform, just because they had been used during the Western Zhou.  

Unlike Wang Mang, Tang Dynasty Emperor Suzong used inflation for purely financial purposes in the mid 8th century. Weakened by the eight-year rebellion led by warlords An Lushan and Shi Siming, the dynasty desperately needed to fund its military. In his edict, Emperor Suzong said the purpose of the reform was to “enrich the assets of the mint and profit tenfold.” In other words, an inflation tax based on seignorage.  

In 758, on the advice of senior official Diwu Qi, Emperor Suzong carried out a devaluation policy similar to Wang Mang’s. New coins with high nominal value were issued to replace the old. The first new coin was officially worth 10 old coins, while its real value should have been around 1.5 times more. The second coin was officially worth 50 old coins when its real exchange rate should have been three coins.  

After Emperor Suzong’s currency reform, the price of grain skyrocketed and people died from starvation. In the capital Chang’an (today’s Xi’an), more people minted their own coins. Even copper bells and statues were stolen from Buddhist temples to melt down for coins. 

Foundation of Fiat 
Devaluations like these were the main causes of inflation in ancient China. But why did emperors keep using devaluation if it created more problems than it solved?  

In ancient China, copper was the primary material used to mint coins. As China was rich in the metal, there were no shortages to constrain government creation of inflation. In contrast, regions such as Europe used rare gold and silver for coins, which put natural limitations on the government’s minting activities.  

However, rarity did not affect the supply of gold or silver coins in Europe. In his book The Power of Gold: The History of an Obsession, American financial historian Peter L. Bernstein writes that limited gold and silver reserves do not cause coin shortages.  

Chinese economist Qian Jiaju and monetary historian Guo Yangang studied the records of the Western Han and Xin dynasties between 202 BCE-23 CE. In their book published in 2005, they concluded that gold and silver were not in short supply in China during that period.  

Chinese monetary historian Peng Xinwei has compared the gold reserves of China during the Han Dynasty and the Roman Empire. In his book published in 1958, he noted that the gold reserves of the Roman Empire were less than that of China during the Han.  

Peng concluded it was not rarity of minting material but minting itself that caused inflation in ancient China.  

Ancient Chinese currencies were fiat, a legal tender whose value is backed by the issuing government, not the material used to mint it. In ancient China, the monarch was at the core of the State. Guanzi, an ancient Chinese political and philosophical text from the 7th century BCE named after its author Guan Zhong, clearly defined currency minted under the reigning monarch as a tool for the State to “control properties, cover civil affairs and thus govern the country.” The book specifies how to adjust the prices of goods, mainly food, in a way similar to today’s inflation and deflation through money supply. Later dynasties adopted these principles, showing how imperial governments sought to solve financial crises by increasing money supply.  

According to economic historian Liu Zhiwei at Sun Yat-sen University, ancient Chinese people’s views on wealth revolved around food and goods. So historical records of economic affairs were often titled “records of food and commodities.” The food and commodities chapter of the Book of Han defines wealth as “natural endowments from heaven and earth,” and the issue was how to gain, possess and distribute them. Emperors were supposed to control the distribution of wealth. Different from modern market economics, which refers to the creation of wealth through division of labor and allocation of resources, supreme imperial power and institutional arrangements made excessive inflation tax possible in ancient China.  

But today, fiat currency depends on the credit of the issuing government, which keeps its money stable. Hyperinflation occurs when the issuing government is not able or willing to stabilize its money. This is the actual difference between ancient Chinese copper coins and fiat money, whether in gold, silver or paper. It is not about the materials used, but the lack of faith in a legal tender.  

The measures one economy takes to deal with inflation can affect other economies around the world. The Fed is expected to raise interest rates more than once in 2022 to control inflation. If so, it will attract more global capital flow to the US. This will make it difficult for other economies, including China, to further relax their monetary policies to boost growth. China’s central bank, the People’s Bank of China, has pledged to continue to pursue “a sound monetary policy that is flexible and appropriate.”