In the second book of The Travels of Marco Polo, Chapter XVIII is entitled: “Of the Kind of Paper Money issued by the Grand Khan, and made to pass current throughout his Dominions.” In this chapter Marco Polo, who lived in China from 1275 to 1292, described the paper money system as follows:
In this city of Kanbulu is the mint of the grand khan, who may truly be said to possess the secret of the alchemist, as he has the art of producing money by the following process. He causes the bark to be stripped from those mulberry-tree the leaves of which are used for feeding silk-worms, and takes from it that thin inner rind, which lies between the coarser bark and the wood of the tree. This being steeped, and afterwards pounded in a mortar, until reduced to a pulp, is made into paper, resembling (in substance) that which is manufactured from cotton, but quite black. When ready for use, he has it cut into pieces of money of different sizes, nearly square, but somewhat longer than they are wide. The coinage of this paper money is authenticated with as much form and ceremony as if it were actually of pure gold or silver; for to each note a number of officers, specially appointed, not only subscribe their names, but affix their signets also; and when this has been regularly done by the whole of them, the principal officer, deputed by his majesty, having dipped into vermilion the royal seal committed to his custody, stamps with it the piece of paper, so that the form of the seal tinged with the vermilion remains impressed upon it, by which it receives full authenticity as current money, and the act of counterfeiting it is punished as a capital offense. Nor dares any person, at the peril of his life, refuse to accept it in payment. When any persons happen to be possessed of paper money which from long use has become damaged, they carry it to the mint, where, upon the payment of only three percent, they may receive fresh notes in exchange. Should any be desirous of procuring gold or silver for the purposes of manufacture, such as of drinking-cups, girdles, or other articles wrought of these metals, they in like manner apply at the mint, and for their paper obtain the bullion they require.
Marco Polo’s account of the paper money system in China may have been a bit optimistic. China had been issuing paper money since a.d. 910 and had already suffered at least one round of hyperinflation before Marco Polo’s visit. Around 1020 inflation and currency depreciation became such a problem that the authorities resorted to perfuming the paper money to make it more attractive. China seemed to have experienced phases of reformed currencies, punctuated with bouts of inflation. By 1448 the Ming note was worth only 3 percent of its face value, and no further references to paper money are found after 1455.
Paper money lost its charm in China owing to inflation, leading to its extinction as a form of state-sponsored money in China until the twentieth century. When the Western world saw a renaissance of paper money toward the end of the seventeenth century, inflation again reared itself as a rock of danger for any paper-money system. Despite the inflation dangers of paper money, however, the societies experiencing the fastest economic development since the beginning of the seventeenth century have been those that learned to use paper money.