The Origins of Paper Money

by | Jul 31, 2019 | Blog

Using paper in exchange for goods or services is so commonplace, that many of us likely think little about how the idea of handing over a sheet of paper that has an intrinsic value came about. On one level, finance and value is a philosophical theory. On another level, paper money was a practical solution to a barter system that was expanding beyond its capabilities.

Carthage

The ancient Phoenician state dated between 814 BCE – 146 BCE is thought to be the first to have used promissory notes as a form of payment, issued on parchment or leather. However, the first known banknote was not developed in Europe.

Dynasties

China in the 7th century under the Tang dynasty was flourishing. The economy was thriving with trade drawing thousands of foreign merchants to the walled cities of China along the Silk Road.

Before paper money, copper coins had been used in trade. The coins were also used as part of funeral rights. The development of coinage, its shapes, uses and values over thousands of years of development in China is well documented. By 202 BCE, under the Western Han Dynasty, a full monetary economy had been developed with coins issued and circulated as payment for taxes, salaries and fines.

As the economy grew, trading with coins became less convenient. The number of coins required to make payments was large. Carrying such a heavy load would be inconvenient. Wealthy merchants would store their coins on a string or chain (the coins had either a square or circular hole in the middle depending on the region and era it was crafted in) and left with a trusted person who would issue a note saying how many coins the merchant had left in their care.

Banknotes

The Song dynasty (960 BCE) saw a short of copper for striking coins, prompting the first issue of generally circulating notes called jiaozi. The Southwest region, now known as Sichuan, often faced copper shortages. The notes were an answer to such shortages in the form of a promise to redeem it for some other object of value, usually coins. The credit notes were often issued for a limited duration, and at some discount to the promised amount later. The jiaozi did not replace coins during the Song dynasty, but were used in conjunction with the coins.

As the economic advantages of printing paper money became evident, the Song dynasty government issued a monopoly right to several of the deposit shops to issue certificates of deposit. Records from the 12th century indicate that the amount of banknotes issued in a single year amounted to 26 million strings of cash coins. By the 1120s the central government, using the newly innovated wood-block printing technique, began issuing state-owned banknotes.

Trade

The use of notes that were backed by the government was attractive to foreign traders. Marco Polo dedicated a whole chapter of his book ‘The travels of Marco Polo’ to the Yuan dynasty’s use of banknotes.

All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver… with these pieces of paper, made as I have described, Kublai Khan causes all payments on his own account to be made; and he makes them to pass current universally over all his kingdoms and provinces and territories, and whithersoever his power and sovereignty extends… and indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan’s dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold.

— Marco Polo, The Travels of Marco Polo

While the Knights Templar were issuing promissory notes in about 1150 BCE, the use of banknotes did not become common in Europe until the mid-17th century when gold inflation forced banking to be reassessed. Many changes and shifts took place before, in the 19th century, a second in a series of Bank Charter Acts established that banknotes would be considered as legal tender during peacetime.

Evolution

The value of paper money is based on the common acceptance and laws that underpin this agreement between people and governments or central banks. The actual value of banknotes is little, but its imaginary value has influenced the shape of international trade and economy.

Perhaps the next evolution of trade is already at hand with the introduction of crypto. Blockchain technology offers an immutable record, which could change the way people interact with the global economy.