The history of paper money is interesting not only from the idea and technolgy of printing, but also from the perspective of trading with a commodity that in itself has no intrinsic value. Clearly the issues of paper currency must inspire confidence for trading something of worth who was responsible for printing the first paper money items of no specific worth, and with the potential to be abused by the issuer as a way to increase the supply and control of items of value, thus creating inflation. For much of its history, China used gold, silver and silk for large sums, and bronze for everyday transactions. The notion of using paper as money is almost as old as paper itself.
The first paper banknotes appeared in China about 806 AD. An early use of paper was for letters of credit transferred over large distances, a practice which the government quickly took over from private concerns. The Chinese, with their great gift for pragmatism, labelled this practice “flying money”. The Song dynasty was the first to issue true paper money in 1023, and it did so at first cautiously, issuing small amounts, used in a limited area, and good for a specific time period. The most famous Chinese issuer of paper money was Kublai Khan, the Mongol who ruled the Chinese empire in the 13th century.
Kublai Khan established currency credibility by decreeing that his paper money must be accepted by traders on pain of death. As further enforcment of his mandate, he confiscated all gold and silver, even if it was brought in by foreign traders. As is to be expected, paper money did not succeed everywhere. In Persia, its forcible introduction in 1294 led to a total collapse of trade. By the 15th century even China had more or less given up paper money. Over this period, paper notes were issued irresponsibly, to the point that their value rapidly depreciated and inflation soared.
Then beginning in 1455, the use of paper money in China disappeared for several hundred years. Western civilization had minted precious metal objects and coins for trade since about 500 BC. Devaluation and inflation often destroyed a monetary system. Banking systems were cyclic with nations and rulers, and the need to transfer large sums of money to finance the Crusades provided a stimulus to the re-emergence of banking in western Europe.
In Europe, the first issuer of paper money was Sweden, where in 1661 Johan Palmstruch’s Stockholm Banco introduced the first banknotes. Lien-Sheng Yang, published by The Far Eastern Quarterly, Vol. Before money had been invented, barter was the oldest way of doing business. People brought their goods to the market to exchange what they needed.