China, or even the whole world, is indebted to Szechuan for the introduction of paper money, in the manner it is known to-day. Szechuan is far removed from the coast and is the western-most province. In the early period of Chinese history the province has more than once been an independent state. When after a rebellion, Kung Sun-shu proclaimed himself at first Governor, and, later Emperor, of this province in about 25 a.d. he put into circulation the iron currency. This iron money was very heavy and weighed 25 catties for 1000 pieces of large coins and 10 catties for 1000 small ones. The people were very much discontented with these heavy coins; and on the initiative of Chang-Yung, a noted administrator at this period, sixteen wealthy business houses formed into a partnership or guild and issued notes as Chiao-Tze or exchanges for circulation. People turned with relief from the heavy iron coins to this paper money, which soon became, for all practical purposes, the currency of the province.
It was all very well for these notes to displace the specie and become the currency of Szechuan; but when there were no proper or constant efforts to maintain the value of the notes there was trouble. As a matter of fact all the sixteen houses that were members had business reverses, the consequence being that their guarantee was of little value and the notes did not actually represent specie. There was a great deal of litigation on this point - while the financial situation was becoming worse every day. In order to prevent a financial debacle the Government declared that these notes were inconvertible paper currency, took over the right of issue from the guild, and established a separate Government office to manage the issue and circulation of paper money. From thence onwards the issue partook of the nature of modern government currency notes. The Government saw the wisdom of keeping metallic reserves. By the first year of Tien-Sheng (1032 a.d.) the issue outstanding was 1,256,340 kuan - the Government keeping a specie reserve of 360,000 kuan. At first the Government restricted the issue to the actual demand and thus obviated every chance of depreciation in values.
When the Government notes had circulated for a fairly long period and when values were for several reasons well maintained it was but natural that, for a time at least, the Government should find no difficulty in issuing as much as it liked. There is reason to believe that at this period in the history of China the authorities never issued paper notes for larger sums than were absolutely needed. But, when in the eleventh century, the prolonged struggle when the Tartars exhausted the resources of the country, the Government was more or less forced to resort to the issue of paper money as a means of raising revenue. At no period in its early history has the Government of China attempted to secure financial gain for itself on account of its control of the monetary system. Circumstances alone necessitated excessive issues of the notes; all means were then devised to check the decline, consequent upon such issue and even to restore the paper note to its face value, in coin or metal. Thus a rule was promulgated that when business was transacted to the value of 10,000 cash or 10 kuan and upwards, half of this sum must be paid in specie and the other half in paper. One of the objects of such a rule was to make it difficult for people to ascertain and compare the fluctuations in the value of the paper; and it was thought that by such means the notes would be restored to their full value in coin or metal. Such artificial means, however, proved of little avail to check the depreciation caused by over-issue of paper. Chinese historians state that when the seat of the Sung Government was moved south, paper to the value of twenty times the original amount fixed upon as the actual requirements of commerce was in circulation, and that all paper money fell to about one-tenth of its par value. To a very great extent, the lessening of the credit of paper money was due to the weakened power of the Sung Government, as a consequence of the frequent defeats at the hand of the Chin Tartars.