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

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 incommensurate with price levels. It is shown that the velocity of money was increasing and comparable to preindustrial 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 realistic validation of the premise of the Needham puzzle.