Monetary theory and policy from a Chinese historical perspective

Abstract

In this paper, we discuss monetary thought in ancient China from the perspective of Western monetary theory. We set out the structure of economic activity in the various dynasties of ancient China and emphasize the differences in monetary structure from those of Europe and later North America. Imperial China was a politically integrated structure with regional segmentation of economic activities and hence with regional money. Monetary policy was conducted at the regional level but overseen politically. In various regions, different forms of money circulated, with gold, silver, copper, and paper money all presented at various times. Monetary policy was guided by monetary thought, as it was also guided later in Europe. Basic concepts, such as monetary functions, the velocity of circulation, inflation, interest rate parity and the quantity theory, were all present. The economics of Imperial China witnessed boom and bust, inflation and deflation and monetary control, similar to what was later seen in Europe. Chinese monetary thought thus seems to have preceded Western monetary thought and the two had remarkable similarities. Whether much of this thought traveled down the Silk Road remains unknown, but the possibility is intriguing.