Kublai Khan
Emperor of the Yuan dynasty

Kublai Khan considered China his main base, realizing within a decade of his enthronement as Great Khan that he needed to concentrate on governing there. From the beginning of his reign, he adopted Chinese political and cultural models and worked to minimize the influences of regional lords, who had held immense power before and during the Song dynasty. Kublai heavily relied on his Chinese advisers until about 1276. He had many Han Chinese advisers, such as Liu Bingzhong and Xu Heng, and employed many Buddhist Uyghurs, some of whom were resident commissioners running Chinese districts.

Kublai also appointed the Sakya lama Drogön Chögyal Phagpa ("the Phags pa Lama") his Imperial Preceptor, giving him power over all the empire's Buddhist monks. In 1270, after the Phags pa Lama created the 'Phags-pa script, he was promoted to imperial preceptor. Kublai established the Supreme Control Commission under the Phags pa Lama to administer affairs of Tibetan and Chinese monks. During Phagspa's absence in Tibet, the Tibetan monk Sangha rose to high office and had the office renamed the Commission for Buddhist and Tibetan Affairs. In 1286, Sangha became the dynasty's chief fiscal officer. However, their corruption later embittered Kublai, and he later relied wholly on younger Mongol aristocrats. Antong of the Jalairs and Bayan of the Baarin served as grand councillors from 1265, and Oz-temur of the Arulad headed the censorate. Borokhula's descendant, Ochicher, headed a kheshig (Mongolian imperial guard) and the palace provision commission.

In the eighth year of Zhiyuan (1271), Kublai officially created the Yuan dynasty and proclaimed the capital as Dadu (Chinese: 大都; Wade–Giles: Ta-tu; lit. ' Grand Capital ', known as Khanbaliq or Daidu to the Mongols, modern Beijing) the following year. His summer capital was in Shangdu (Chinese: 上都; lit. ' Upper Capital ', also called Xanadu, near what today is Dolon Nor). To unify China, Kublai began a massive offensive against the remnants of the Southern Song in 1274 and finally destroyed the Song in 1279, unifying the country at last at the Battle of Yamen where the last Song Emperor Zhao Bing committed suicide by jumping into the sea and ending the Song dynasty.

Most of the Yuan domains were administered as provinces, also translated as the "Branch Secretariat", each with a governor and vice-governor. This included China proper, Manchuria, Mongolia, and a special Zhendong branch Secretariat that extended into the Korean Peninsula. The Central Region (Chinese: 腹裏) was separate from the rest, consisting of much of present-day North China. It was considered the most important region of the dynasty and was directly governed by the Zhongshu Sheng at Dadu. Tibet was governed by another top-level administrative department called the Bureau of Buddhist and Tibetan Affairs.

Kublai promoted economic growth by rebuilding the Grand Canal, repairing public buildings, and extending highways. However, his domestic policy included some aspects of the old Mongol living traditions, and as his reign continued, these traditions would clash increasingly frequently with traditional Chinese economic and social culture. Kublai decreed that partner merchants of the Mongols should be subject to taxes in 1262 and set up the Office of Market Taxes to supervise them in 1268. After the Mongol conquest of the Song, the Muslim, Uighur and Chinese merchants expanded their operations to the South China Sea and the Indian Ocean. In 1286, maritime trade was put under the Office of Market Taxes. The main source of revenue of the government was the monopoly of salt production.

The Mongol administration had issued paper currencies from 1227 on. In August 1260, Kublai created the first unified paper currency called Jiaochao; bills were circulated throughout the Yuan domain with no expiration date. To guard against devaluation, the currency was convertible with silver and gold, and the government accepted tax payments in paper currency. In 1273, Kublai issued a new series of state sponsored bills to finance his conquest of the Song, although eventually a lack of fiscal discipline and inflation turned this move into an economic disaster. It was required to pay only in the form of paper money. To ensure its use, Kublai's government confiscated gold and silver from private citizens and foreign merchants, but traders received government-issued notes in exchange. Kublai Khan is considered to be the first fiat money maker. The paper bills made collecting taxes and administering the empire much easier and reduced the cost of transporting coins. In 1287, Kublai's minister Sangha created a new currency, Zhiyuan Chao, to deal with a budget shortfall. It was non-convertible and denominated in copper cash. Later Gaykhatu of the Ilkhanate attempted to adopt the system in Iran and the Middle East, which was a complete failure, and shortly afterwards he was assassinated.

Kublai encouraged Asian arts and demonstrated religious tolerance. Despite his anti-Daoist edicts, Kublai respected the Daoist master and appointed Zhang Liushan as the patriarch of the Daoist Xuánjiào (玄教, "Mysterious Order"). Under Zhang's advice, Daoist temples were put under the Academy of Scholarly Worthies. Several Europeans visited the empire, notably the Italian explorer Marco Polo in the 1270s, who was appointed to serve as Khan's foreign emissary throughout the empire and lived in the emperor's lands for 17 years.

During the Southern Song, the descendant of Confucius at Qufu, Duke Yansheng Kong Duanyou fled south with the Song Emperor to Quzhou, while the newly established Jin dynasty (1115–1234) in the north appointed Kong Duanyou's brother Kong Duancao who remained in Qufu as Duke Yansheng. From that time up until the Yuan dynasty, there were two Duke Yanshengs, once in the north in Qufu and the other in the south at Quzhou. An invitation to come back to Qufu was extended to the southern Duke Yansheng Kong Zhu by the Yuan dynasty Emperor Kublai Khan. The title was taken away from the southern branch after Kong Zhu rejected the invitation, so the northern branch of the family kept the title of Duke Yansheng. The southern branch still remained in Quzhou where they lived to this day. Confucius's descendants in Quzhou alone number 30,000.

Yuan Emperors like Kublai Khan forbade practices such as butchering according to Jewish (kashrut) or Muslim (dhabihah) legal codes and other restrictive decrees continued. Circumcision was also strictly forbidden.
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