Zhu Jiaming: The Civilizational Heritage from Jiaozi to Digital Currency

Editor's Note: Professor Zhu Jiaming, an economist and chairman of the Academic and Technical Committee of the Digital Asset Research Institute, delivered a speech titled "The Civilizational Heritage from Jiaozi to Digital Currency" at the "First Jiaozi Academic Forum and 'Jiaozi Festival' Initiation Ceremony," jointly initiated by the Sichuan Financial Museum and the China Currency Museum on January 12 this year. He elaborated on the history of Jiaozi from a broader perspective and compared the Jiaozi from 1000 years ago with today's digital currency from several angles. This article was published in the 1009th issue of the Economic Observer.

This year is 2021, and in three years, it will mark the 1000th anniversary of the birth of Jiaozi in China's Northern Song Dynasty. Jiaozi was the world's first paper currency to replace metal currency as a medium of economic transactions, becoming one of the most significant innovations in human economic history and the history of monetary finance. A thousand years later, the birth and development of digital currency are reshaping this traditional monetary and financial ecology. Therefore, comparing Jiaozi and digital currency and exploring their civilizational heritage patterns is very meaningful.

I. Comparison of Economic Transformation Processes

The Song Dynasty initiated China's "economic transformation" from a typical agrarian society to a commercial society. The Song Dynasty is divided into the Northern Song and Southern Song, with the Northern Song from 960 to 1127 and the Southern Song from 1270 to 1279, totaling 319 years, which ranks only behind the Zhou and Han Dynasties in terms of the length of the dynasty.

The "economic transformation" of the Song Dynasty is a significant topic in Chinese history. The pioneering contribution in this regard is attributed to Japanese historian Naito Konan (1866-1934), who proposed the "Tang-Song Transformation Theory" in the early 20th century and later refined and enriched the "Song Dynasty Modern Theory." Naito Konan's "Tang-Song Transformation Theory" and "Song Dynasty Modern Theory" have had a profound impact on Western sinologists and Chinese Song historians, leading to concepts and theories such as the "economic revolution," "commercial revolution," and "maturity of feudal society," even "pre-capitalism" in the Song Dynasty.

I personally support the "Tang-Song Transformation Theory." The Song Dynasty fully opened the transition from traditional agriculture to a commercial society. Specifically, after the mid-11th century, "the Chinese economy no longer possessed the relatively closed natural economic state envisioned by conservatives. Especially in southern China, commercial development brought about tremendous changes in economic relations, breaking the self-sufficient economy, promoting regional economic specialization and changes in household production methods, serving the market while relying on the market for its own development, and the function of currency as a medium for the exchange of goods and services continued to expand." (Cambridge History of China: Song Dynasty, China Social Sciences Press, 2020, p. 353) The "commercial revolution" of the Song Dynasty propelled an unprecedented period of commercial prosperity. "Dreams of the Eastern Capital" and "Along the River During the Qingming Festival" recorded the details of the Northern Song commercial society through literature and art. In fact, compared to the Northern Song, the level of commercialization in the Southern Song was even more developed; the prosperity depicted in "Dreams of the Eastern Capital" and "Records of the Capital" was comparable to or even surpassed that of the Eastern Capital.

Many factors supported the "commercial revolution" of the Song Dynasty. First, the complete disintegration of the aristocratic family system, the slave system, and the manor system; second, a significant population increase, regional autonomy, urbanization, domestic migration, property rights revolution, contractualization, monetization, and consumerism; in addition, there were technological innovations, handicraft revolutions, coal and iron revolutions, and the expansion of international trade.

Core Structure of the "Commercial Revolution" in the Song Dynasty

The business culture of the Song Dynasty spread across all social classes. In the fiscal structure of the Song Dynasty, contributions from industry and commerce even caused the proportion of agricultural taxes to gradually decline. By the Chunxi-Shaoxi period of the Southern Song, non-agricultural taxes accounted for over 80%. China became a typical example of a developed commercial society during that era. The Song Dynasty interrupted the traditional "valuing agriculture and suppressing commerce," forming a unique Chinese "mercantilism," which, compared to the early mercantilism of the European Renaissance in the early 15th century, had both differences and certain similarities.

The regional pattern of the Chinese economy had already completed the shift of the "economic center" from the north to the south during the "Five Dynasties and Ten Kingdoms" period. Entering the Song Dynasty, Sichuan became one of the most economically developed regions in the country. During the Chongning period of the Northern Song, the population accounted for about one-tenth of the national total. Among them, the population density in the Chengdu and Zizhou regions of western Sichuan was the highest in the country. Sichuan not only had developed agriculture and various handicrafts but also grew into a major economic hub in China due to the trade of tea, horses, and salt. During the reign of Emperor Shenzong of the Northern Song, the total commercial tax collected from Sichuan accounted for about 20% of the national total. These factors directly contributed to the birth of Jiaozi in Sichuan.

Therefore, simply attributing the emergence of Jiaozi during the reign of Emperor Renzong of the Song Dynasty to a currency shortage or the heavy weight of iron and copper coins and high transportation costs is insufficient to explain and address the fundamental reasons. The Northern Song began the transition from a traditional agrarian society to a commercial society, and the development of the commodity economy and the formation of the credit system accelerated the monetization process of the entire society.

The contemporary economic transformation is a global shift from the real economy to the digital economy. This economic transformation originated from the computer revolution in the latter half of the 20th century, followed by the internet revolution, which not only accelerated the arrival of the "post-industrial society" but also initiated the evolution towards an "information society." Shortly after the global financial crisis in 2008, digital currencies represented by Bitcoin were invented and developed, forming a coexistence of traditional real economy and digital economy, with the digital economy beginning to transform the traditional real economy.

II. Comparison of Currency "Ownership"

Song Dynasty paper currency: "private," "official," and "public." Jiaozi has at least gone through three stages: "private," "official," and "public."

The first stage is the "private Jiaozi" stage. In the early Northern Song, merchants in Chengdu, Sichuan, began cash management services for large sums of money that were inconvenient to carry. Depositors handed over cash to the shopkeepers, who recorded the deposit amount on paper made from mulberry bark and returned it to the depositors, charging a certain storage fee. These shopkeepers were known as "Jiaozi shopkeepers," and the temporary paper vouchers recording the deposit amounts were called Jiaozi. According to Mr. Jin Gang's research, the "private Jiaozi" began in the first year of the reign of Emperor Taizong of Song (995 AD), when Sichuan merchants began to trade using paper currency.

The second stage is the transition from "private Jiaozi" to "official Jiaozi." During the Jingde period of the Northern Song (1004-1007), Zhang Yong, the governor of Yizhou, reformed the Jiaozi shopkeepers, allowing only 16 wealthy merchants to operate. At this point, the issuance of "Jiaozi" officially gained government recognition, but it did not mean it had entered the "official Jiaozi" stage.

The third stage is the "official Jiaozi" stage. In the first year of the reign of Emperor Renzong of Song (1023), the government established the Yizhou Jiaozi Office, issuing the first "official Jiaozi." Later generations generally regard the issuance date of the "official Jiaozi" in 1023 as the birth date of "Jiaozi."

The complete history of Jiaozi must trace back to its origin in the "private" stage. If we count from 995, as Mr. Jin Gang's research suggests, it means that a generation after the establishment of the Song Dynasty had already created "Jiaozi," which lasted until 1109 when "Qianyin" replaced it, spanning 119 years. As for the circulation period of "Qianyin," it extended across the Northern and Southern Song, from 1109 to 1234, during which "Huizi" also circulated widely throughout the Southern Song.

Additionally, "Guanzi" circulated from 1131 to 1264 in the Southern Song. However, in-depth research on "Qianyin," "Huizi," and "Guanzi" makes it difficult to conclude that there were no "private" components, especially since the institutions managing these paper currencies were largely "privatized."

Contemporary "digital currency" also has "private," "official," and "public" ownership. Since the birth of Bitcoin in 2008, the evolution of digital currency over the past decade has formed three forms of "private," "official," and "public." Various types of digital currencies in the private sector are "privately owned," while central bank-issued legal digital currencies are "officially owned," and some digital currencies issued by institutions and social enterprises exhibit clear "public" characteristics.

III. Comparison of Currency Value Foundations

The credit foundation of Song Dynasty paper currency. The paper currency of the Song Dynasty, from Jiaozi to Huizi, exhibited continuity and did not experience interruption due to political changes. The monetary economy of the Song Dynasty saw different paper currencies coexisting for extended periods. Paper currency likely held a dominant position in the Song Dynasty's monetary system, surpassing the status of copper coins and other metal currencies. In other words, throughout the Song Dynasty's monetary system, it was not copper coins and metal currencies that were central, but state-backed paper currency. By the late Southern Song, paper currency itself was quite "diversified," including Huizi, Qianyin, Huai Jiao, and Lu Hui, as well as silver Huizi and iron Huizi from outside the pass.

The monetary history of the Song Dynasty is essentially the evolution of its paper currency. The paper currency of the Song Dynasty underwent a transformation from being not entirely a "credit currency" to becoming a fully "credit currency." During the Jiaozi era of the Northern Song, the government still placed considerable emphasis on the preparation support of its metal currency, maintaining a reserve of about 28%-29% in metal currency. However, starting from the late Northern Song and continuing into the Southern Song, many scholars and officials recognized that the credit of paper currency no longer required reserves, and paper currency gained legal tender status, allowing it to circulate independently of reserves, hence the saying "law is circulation, and the people find it convenient."

Under the credit currency system of the Song Dynasty, the government continuously expanded state credit currency to fill the long-term supply gap of metal currency, supporting the real economy and forming a conscious interaction between monetization and the commercial revolution. For most of the Northern and Southern Song periods, the government essentially achieved a balance between avoiding deflation and controlling inflation. In the mid to late Southern Song, the government implemented the "weighing and proposing method," linking the value of precious metals, copper coins, promissory notes, and valuable physical goods to the value of paper currency, promoting the recovery of over-issued paper currency and alleviating the pressure of widespread depreciation. This was a remarkably modern financial strategy.

Overall, in terms of monetary economy, the Song Dynasty exhibited a strong awareness of abandoning support for the metal reserves of paper currency, placing the value of paper currency entirely on the foundation of state credit, believing that paper currency could achieve circulation independent of reserves, thus pioneering the credit currency system in human history.

Neither the Northern Song nor the Southern Song fell into a state of economic system disintegration or so-called "hyperinflation" from which they could not extricate themselves. The Northern Song fell due to the defeat in the war against the Jin Dynasty in the second year of the Jingkang era, while the Southern Song fell due to the defeat in the war against the Mongol Yuan. However, the prolonged war between the Southern Song and the Mongol Yuan, lasting about 40 years, triggered economic, fiscal, and monetary crises, compounded by social, political, and military crises, ultimately leading to its downfall. Attributing the fall of the Southern Song to hyperinflation is actually "grasping at straws" and does not align with the true historical context.

There is also a need to reassess the historical significance of Wang Anshi's reforms. The Northern Song faced a fiscal crisis in the mid-11th century due to years of external warfare, which was the direct historical background for Wang Anshi's reforms. The Qingmiao Law, the Recruitment Law, and the Market Exchange Law promoted by Wang Anshi aimed to increase the fiscal revenue of the state in monetary forms. For example, the Qingmiao Law established a government-led rural loan system to relieve farmers from usurious exploitation; the Recruitment Law established a system where households shared the monetary burden, allowing local governments to hire laborers; the Market Exchange Law used government market funds to stabilize market prices, allowing merchants to obtain government loans by pledging their assets. The core feature of these reforms was to appeal to monetary and financial means, especially through state-led loan interest to provide funding for the national treasury, meeting the state's excessive monetization demands and impulses, maximizing tax revenue and improving the fiscal situation.

Wang Anshi himself, along with supporters represented by Emperor Shenzong of Song, recognized the liquidity, expansiveness, and appreciation of credit paper currency, experiencing and promoting the monetization process since the "Jiaozi Revolution." However, Wang Anshi's reforms ultimately ended in failure. This was because the level of agricultural and industrial economic development during Wang Anshi's time was too low to support the advanced monetization process, leading to a rupture between the real economy and the monetary economy, making the effectiveness of monetary policy unsustainable, quickly losing marginal utility, and ultimately exacerbating the fiscal crisis. Nevertheless, it must be acknowledged that Wang Anshi's reforms were a forward-looking experiment in "Keynesianism" in the Song Dynasty, where the government sought to stimulate effective demand from farmers and merchants through monetary and financial means, increasing the supply of social wealth.

The credit foundation of contemporary digital currency. Since the emergence of digital currencies, especially various stablecoins, their value foundations have shown a diversified state, including at least those based on fiat currency, asset-based value, and algorithm-based value. Among them, the value foundation of fiat digital currency is the sovereign state and government.

Ultimately, the value foundation of digital currency is supported by a technological system that includes blockchain. The significant appreciation of Bitcoin since the end of 2020 is proof of this. People have realized that Bitcoin has a series of advantages compared to the value of traditional fiat currencies and gold. It is certain that the trend of Bitcoin's value surpassing that of gold will continue, and digital currency will deliver a final fatal blow to the residual value of precious metals. Because of Bitcoin, gold will ultimately repeat the historical trajectory of copper and silver in terms of monetary value functions, completely leaving the stage of monetary economy and becoming a metal in the usual sense.

Thus, the emergence of digital currency recreates the historical context of the birth of Jiaozi: on one hand, traditional and government-backed credit currencies continue to exist, just as copper and iron coins did in the Song Dynasty; on the other hand, just as credit paper currencies from Jiaozi to Huizi dominated economic activities in the Song Dynasty, algorithm- and technology-based digital currencies are entering a stage of comprehensive rise, showing the prospect of ultimately achieving dominance in economic activities.

IV. Comparison of the Technical Foundations of Currency

The technical prerequisites for Jiaozi. Throughout the Song Dynasty, from the Northern Song to the Southern Song, the currency system was supported not by copper coins, nor by iron coins, but by paper currency. Because Jiaozi needed to circulate repeatedly, with a minimum circulation time of about three years, the requirements for paper quality, printing, and ink were quite strict. Therefore, Jiaozi and other Song Dynasty paper currencies were technically sophisticated and inseparable from the advancements in paper manufacturing technology and printing techniques.

The invention of paper in China is attributed to Cai Lun during the Han Dynasty. By the Song Dynasty, building on the comprehensive inheritance of Sui, Tang, and Five Dynasties paper-making technologies, the production areas, raw materials, techniques, and the quality, quantity, and types of paper products, as well as their roles in daily life, all significantly surpassed those of previous dynasties, forming a complete industrial chain and reaching a level of "full maturity." The notable advantage of Song Dynasty paper was its durability, resistance to moisture, and long-lasting quality. It is worth emphasizing that Sichuan has been a center for paper-making since the Tang Dynasty, maintaining a leading position nationwide. In the Song Dynasty, Chengdu's paper-making technology was superb, producing "Chupi paper" made from the resilient fibers of the mulberry tree, which was of the highest quality and difficult to forge, making it the best paper for printing Jiaozi. The "paper" for Jiaozi was initially commissioned by the government to be manufactured by the private sector. In the first year of the reign of Emperor Shenzong of Song (1068), the government officially established a "Paper Manufacturing Office" to produce Chupi paper specifically for printing Jiaozi. During the issuance of Huizi in the Southern Song, the government still stipulated that Sichuan Chupi paper should be used as much as possible for printing currency.

Ancient Paper-Making Process Diagram

Before Bi Sheng invented movable type printing, Chinese printing technology was mainly reflected in methods such as imprinting, rubbing, and woodblock printing. The Jiaozi, which emerged before Bi Sheng's invention of movable type printing, clearly used woodblock printing. Woodblock printing was invented during the Tang Dynasty and became widely used during the Song Dynasty, becoming the mainstream in society. It is certain that the woodblock printing for Jiaozi, from raw materials to manual carving techniques and printing processes, represented the highest level of the time. Regarding the printing of Jiaozi, it was necessary to overcome the technical challenges of metal plates and color printing. Therefore, the privately issued Jiaozi by wealthy merchants in Chengdu during the reign of Emperor Zhenzong was already printed with high quality. After the government took over the issuance of Jiaozi, the printing became even more rigorous, with the central government of Song directly involved in the casting of the copper seal for the Yizhou Jiaozi Office. The printing of Jiaozi utilized multiple copper plates for color printing. In the late Northern Song, Jiaozi was printed using six copper plates in black, blue, and red, marking a milestone in the history of printing.

Moreover, the division of labor and management in the paper currency manufacturing process during the Song Dynasty should have been advanced and strict. Teacher Wang Wei provided information from Japanese literature regarding the internal division of labor in the government coin workshops during the reign of Emperor Shenzong, involving supervisors, managers, coin makers, book binders, printers, carvers, and miscellaneous workers, estimated to be as many as 186 people.

In summary, the printing volume of Jiaozi and Huizi during the Song Dynasty was enormous, placing high demands on the supply of paper, the production technology of copper plates, and printing techniques. Therefore, the emergence of Jiaozi in the Song Dynasty was not only a product of the highly prosperous economy of Sichuan during the Tang and Song Dynasties but also a testament to the advanced paper-making and printing technologies in China.

The technical foundation of "digital currency." The technical foundation of "digital currency" includes two basic aspects: first, indirect technologies, such as ITC technology, big data, and cloud computing technology; second, direct technologies, such as blockchain technology and algorithm technology, as well as the currently popular DeFi technology.

If we understand Jiaozi and Huizi as the 1.0 version of China's credit currency, then the Zhongtong Yuanbao Jiao in the Yuan Dynasty is 2.0, and the Baochao in the Ming Dynasty is 3.0. After that, China experienced a historical phase of monetary economy transitioning to silver. However, in the 1930s, the implementation of "abolishing the silver standard and reforming the currency" finally returned China's monetary economy to the track of legal tender credit currency that had been interrupted for hundreds of years since the Ming Dynasty under new historical conditions.

In the grand historical perspective, it is not difficult to recognize that the emergence of Jiaozi was not the result of the natural evolution of metal currency, nor was it a simple change in currency form. Today, with the birth of Bitcoin, a diverse digital currency system is rapidly forming, changing the absolute monopoly of the traditional fiat currency system and further promoting the decline and eventual end of the value of gold that has influenced humanity for thousands of years. Comparing Bitcoin and gold, Bitcoin excels in a series of aspects such as scarcity, transaction, storage, and hedging. Therefore, on March 3, 2017, the price of one Bitcoin was $1,290, while one ounce of gold was priced at $1,228, with one Bitcoin just exceeding the price of one ounce of gold; by February 2021, the price of Bitcoin surpassed $50,000, while one ounce of gold fluctuated around $1,800, meaning one Bitcoin could buy approximately 27.78 ounces of gold. The trend of rising Bitcoin prices and relatively declining gold prices seems to have entered an irreversible stage.

The invention of Jiaozi a thousand years ago was a mutation in the history of human currency, a great revolution that initiated the earliest experiment of the credit currency system; a thousand years later, the rise of digital currency represents another great revolution in the history of human currency, which will undoubtedly accelerate the arrival of the digital economy era.