Velocity of Money and Economic Development in Medieval China: The case of Northern Song

• Published date: 01 May 2014
• DOI: http://doi.org/10.1111/rode.12079
• Date: 01 May 2014

Velocity of Money and Economic Development in

Medieval China: The case of Northern Song

Baomin Dong and Jiong Gong*

Abstract

A Fisher’s Identity model is established to study Northern Song China’s (960–1126) level of velocity of

money using money supply and gross domestic product (GDP) data. Results of the exercise help rationalize

what is called the “bronze coin” puzzle, which is the massive amount of minted coins seemingly incommen-

surate with price levels. It is shown that the velocity of money was increasing and comparable to pre-

industrial England levels. This paper argues that the driving forces of the short supply of money are greater

than usual hoarding by the state treasury and coin outflows to Song’s trading partners via smuggling. Since

velocity of money is an indicator of economic development in ancient societies, this paper provides a real-

istic validation of the premise of the Needham puzzle.

1. Introduction

The monetary policy of the Song dynasties (960–1279) in China constitutes one of the

many intriguing puzzles as the derivatives of the broader and grander Needham

puzzle (Needham, 1986) as to why industrial revolution had not taken place in China.

Aside from agricultural and industrial technology advancement, Song also appears to

have been an economic superpower, with a vibrant market economy and a flourishing

global trader. Perhaps the most perplexing puzzle of the Northern Song era, which

we call the “bronze coin” puzzle, lies in the extraordinary amount of money in

circulation—the imperial court mints generated on the order of some 6 billion bronze

coins per year, 260 billion coins in total or roughly 2500 coins per capita: a level never

again exceeded by a Chinese imperial government.1Yet prices were remarkably

stable over nearly one and a half centuries, barring some wartime outliers. There was

little inflation and in some periods of time, falling prices were even experienced. This

seems to contradict the basic principle of monetary economics that predicts inflation-

ary prices accompanied by falling value of money when money supply is plentiful.

The relationship between money and the size of the economy it serves is regulated

by the Fisher Identity, which can be written as MV =PT, where Mstands for money

supply, Vstands for velocity of money, and Pand Trepresent prices and transactions

respectively. PT is also sometimes jointly represented by an estimate of the gross

domestic product (GDP) or national income. Apparently the key to the “bronze coin

puzzle” essentially boils down to rationalizing the relationship among the money

supply, the velocity of money and the GDP size under the Fisher Identity framework

* Dong: School of Economics, Henan University, 1 Jinming Road, Kaifeng, Henan, China, 475000. Tel:

+86-371-23881606; Fax: +86-371-23881609; E-mail: baomindon@gmail.com. Gong: University of Interna-

tional Business and Economics, Beijing, China, 100029. Tel: +86-10-64493301; Fax: +86-10-64493042;

E-mail: johngong@gmail.com. We wish to thank Bo Chen, Lex Zhao, Kaixiang Peng, Debin Ma, IEFS

China 2012 conference participants and an anonymous referee for their comments which improved the

paper. All errors are our own.

Review of Development Economics, 18(2), 203–217, 2014

DOI:10.1111/rode.12079

© 2014 John Wiley & Sons Ltd