Who Invented Paper Money?
Paper, printing, and paper money originated in China way back during the Tang Dynasty. Here is how its use spread through other dynasties and around the world.
China invented paper money during the Tang Dynasty that ruled between 618 and 907, and they used this currency for a long time before it found its way to other countries. In fact, when the famous traveler Marco Polo visited China, somewhere between 1275 and 1292, he found paper money so intriguing that he dedicated a whole chapter to it in his book. Being shrewd business people, the Chinese found the weight of the coin money to be cumbersome and figured that printed money would be more efficient. It makes sense too, considering that China also invented paper and printing. Paper money was conceived when merchants began leaving the heavy coins behind with a trusted agent who would record on paper how much money had been left as a deposit. This period was likely the beginning of banking as well.
The Government Steps In
The merchant would then proceed to buy goods by showing the promissory note as a guarantee that he/she had money and could pay at a later date. The government would later take up this idea and instead of traders depositing their money in exchange for a promissory note or draft with their corporations, the government would convince them to deposit their coin currency with them in exchange for notes. The government would continue to issue new notes, but because it never withdrew the old ones from circulation, this led to depreciation, as we will see later.
During the Song Dynasty – Paper Money Becomes a Government Affair
During the Song Dynasty that came after Tang, there would be great changes that would make paper money even more popular. For example, the central and provincial governments licensed many shops in towns where people could go to exchange their coin money for paper notes. Many years later, Song would take control of this situation and make the issuing of paper money a government affair and would print paper money (Jiaozi) and release it into the system directly without going through agencies.
This led to the establishment of factories in Anqi, Huizhou, Hangzhou, and Chengdu where the paper money would be printed using special methods such as mixing different fibers to prevent the printing of counterfeit money. Printing woodblocks (sort of like stamping) would be dipped in various colors for printing. These colors could be as many as six. It was determined that the notes would expire in three years.
Use of Paper Money is Stopped
Nearly 2000 years before paper money arrived in Europe, it was already being used for trade in China. This means that paper money came to be around 140 BC. While it made trade easy, paper money in China did not come without its ill effects. For example, around 1455, paper money was altogether eliminated from the economy because too much of it had been printed, causing dire inflation. The government did try to collect the cash and centralize it, but their efforts were unsuccessful. During the Mongol Dynasty, the government tried to recall the paper notes that had been issued by the central government, provincial government and private agencies.
Later on—after China had already banned paper money, went a century or two without it, brought it back, suffered through depressions and so on—paper money did eventually make its way to Europe, through merchants who would traverse the world for trade.
The Yuan Dynasty would later issue its own paper money, calling it Chao. However, Yuan made a mistake since they just kept printing more money and releasing it into circulation until the dynasty fell in 1368 and left the country in deep inflation.
The Modern Day Yuan
After the Yuan Dynasty, the Ming Dynasty came to power and printed more paper money, and as a result did not help with the problem of inflation. This is what forced Ming to stop printing more money and turn to using ingots from Mexico and Peru.
China would not use paper money again for 450 years. They only started using it again in the 1890s when the then Qing Dynasty started circulating the Yuan, and that continues to be the name of the Chinese currency today.