Paper money began because Chinese coin strings were too heavy
Tang dynasty merchants in China paid with round copper coins, each with a square hole so they could be threaded onto rope. Big deals meant hauling heavy strings of them around. So traders left their coins with someone they trusted and carried a paper receipt instead. Those slips, nicknamed flying money, became the first known paper money.
Flying money appeared in the seventh century as private receipts of deposit. True paper currency, called jiaozi, grew out of them under the Song dynasty, which was short of copper for coins. At first notes were issued by licensed deposit shops, but by the 1120s the state was printing its own from woodblocks. Demand for paper was enormous. One prefecture alone sent a million and a half sheets a year to the capital until Emperor Huizong reduced the burden in 1101, and in 1175 the government money factory at Hangzhou employed more than a thousand workers daily.
Early Song notes were valid only in one region and only for three years. To defeat forgers, printers used at least six ink colours from 1107, intricate designs and sometimes special fibres mixed into the paper. Kublai Khan's Yuan dynasty issued its own notes, and when silver and gold ran short it dropped the time limits altogether. Marco Polo was astonished that paper made from tree bark passed everywhere in the Khan's lands as readily as pure gold, and devoted a chapter of his travels to it.
Europe got there by other routes. Around 1150 the Knights Templar gave pilgrims documents for valuables deposited at home, which could be cashed in the Holy Land. Italian and Flemish traders, wary of carrying cash long distances, used promissory notes that soon became payable to whoever held them; the phrase bank note comes from the Italian nota di banco of the fourteenth century.
Modern banknotes emerged in seventeenth-century London, where goldsmith bankers began making receipts payable to the bearer rather than the depositor, and lent out more notes than they held in metal, trusting that not everyone would cash in at once. Stockholms Banco made the first European bank issue in 1661. Revolutionary France printed assignats so freely that they collapsed, and Napoleon then founded the Bank of France.
Source: Paper money
