Paper money, often referred to as a note or a bill (North American English), is a type of negotiable promissory note that is payable to the bearer on demand, making it a form of currency. The main types of paper money are government notes, which are directly issued by political authorities, and banknotes issued by banks, namely banks of issue including central banks. In some cases, paper money may be issued by other entities than governments or banks, for example merchants in pre-modern China and Japan. "Banknote" is often used synonymously for paper money, not least by collectors, but in a narrow sense banknotes are only the subset of paper money that is issued by banks.
Paper money is often, but not always, legal tender, meaning that courts of law are required to recognize them as satisfactory payment of money debts.
Counterfeiting, including the forgery of paper money, is an inherent challenge. It is countered by anticounterfeiting measures in the printing of paper money. Fighting the counterfeiting of notes (and, for banks of cheques) has been a principal driver of security printing methods development in recent centuries.
History
Code of Hammurabi Law 100 ( 1755–1750 BC) stipulated repayment of a loan by a debtor to a creditor on a schedule with a maturity date specified in written contractual terms. Law 122 stipulated that a depositor of gold, silver, or other chattel/movable property for safekeeping must present all articles and a signed contract of bailment to a notary before depositing the articles with a banker, and Law 123 stipulated that a banker was discharged of any liability from a contract of bailment if the notary denied the existence of the contract. Law 124 stipulated that a depositor with a notarized contract of bailment was entitled to redeem the entire value of their deposit, and Law 125 stipulated that a banker was liable for replacement of deposits stolen while in their possession.
Carthage was purported to have issued government notes on parchment or leather before 146 BC. Hence Carthage may be the oldest user of lightweight promissory notes. In China during the Han dynasty, promissory notes appeared in 118 BC and were made of leather. Rome may have used a durable lightweight substance as promissory notes in 57 AD, which have been found in London.
The first documented paper money was issued during the Tang dynasty and Song dynasty of China, starting in the 7th century, called "flying money". Its roots were in merchant receipts of deposit during the Tang dynasty (618–907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions. However, government issued centralized paper money did not appear until the 11th century, during the Song dynasty.
The first European attempt by a bank of issue at issuing banknotes was in 1661 by Stockholms Banco, whose legacy was soon taken over by Sweden's Sveriges Riksbank. The French Revolution resulted in the mass issuance of government notes known as assignats whose value soon collapsed, leading Napoleon to establish the Bank of France to issue paper banknotes in the early 1800s.
Early Chinese paper money
The first known paper money instrument was used in China in the 7th century, during the Tang dynasty (618–907). Merchants would issue what are today called promissory notes in the form of receipts of deposit to wholesalers to avoid using the heavy bulk of copper coinage in large commercial transactions. Before these notes, circular coins with a rectangular hole in the middle were used. Multiple coins could be strung together on a rope. Merchants found that the strings were too heavy to carry around easily, especially for large transactions. To solve this problem, coins could be left with a trusted person, with the merchant being given a slip of paper (the receipt) recording how much money they had deposited with that person. Their coins would be restored when they went back and gave that person the paper.
True paper money, called "jiaozi", developed from these promissory notes by the 11th century, during the Song dynasty. By 960, the Song government was short of copper for striking coins, and issued the first generally circulating notes. These notes were a promise by the ruler to redeem them later for some other object of value, usually specie. The issue of credit notes was often for a limited duration, and at some discount to the promised amount later. The jiaozi did not replace coins but was used alongside them.
The central government soon observed the economic advantages of printing paper money, issuing a monopoly for the issue of these certificates of deposit to several deposit shops. By the early 12th century, the amount of notes issued in a single year amounted to an annual rate of 26 million strings of cash coins. By the 1120s, the central government started to produce its own state-issued paper money (using woodblock printing).
Even before this point, the Song government was amassing large amounts of paper tribute. It was recorded that each year before 1101, the prefecture of Xin'an (modern Shexian, Anhui) alone would send 1,500,000 sheets of paper in seven different varieties to the capital at Kaifeng. In 1101, the Emperor Huizong of Song decided to lessen the amount of paper taken in the tribute quota because it was causing detrimental effects and creating heavy burdens on the people of the region. However, the government still needed masses of paper products for the exchange certificates and the state's new issuing of paper money. For the printing of paper money alone, the Song government established several government-run factories in the cities of Huizhou, Chengdu, Hangzhou, and Anqi.
The workforce employed in these paper money factories was quite large; it was recorded in 1175 that the factory at Hangzhou alone employed more than a thousand workers a day. However, the government issues of paper money were not yet nationwide standards of currency at that point; issues of notes were limited to regional areas of the empire, and were valid for use only in a designated and temporary limit of three years.
Between 1265 and 1274, the late southern Song government introduced a gold- or silver-backed national paper currency standard, which changed the geographic restriction. The range of varying values for these notes was perhaps from one string of cash to one hundred at the most. Ever after 1107, the government printed money in no less than six ink colors and printed notes with intricate designs and sometimes even with mixture of a unique fiber in the paper to combat counterfeiting.
The founder of the Yuan dynasty, Kublai Khan, issued paper money known as Jiaochao. The original notes were restricted by area and duration, as in the Song dynasty, but in the later years, facing massive shortages of specie to fund their rule, the paper money began to be issued without restrictions on duration. The fact that the state was guaranteeing the Chinese paper money impressed Venetian merchants.
Early European paper money
According to a travelogue of a visit to Prague in 960 by Ibrahim ibn Yaqub, small pieces of cloth were used as a means of trade, with these cloths having a set exchange rate versus silver.Jankowiak, Marek. Dirhams for slaves. Medieval Seminar, All Souls, 2012, p. 8
Around 1150, the Knights Templar would issue notes to pilgrims. Pilgrims would deposit valuables with a local Templar preceptory before embarking for the Holy Land and receive a document indicating the value of their deposit. They would then use that document upon arrival in the Holy Land to receive funds from the treasury of equal value.
In the 13th century, Chinese paper money of Mongol Yuan became known in Europe through the accounts of travelers, such as Marco Polo and William of Rubruck. Marco Polo's account of paper money during the Yuan dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled "How the Great Kaan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over his Country".
In medieval Italy and Flanders, because of the insecurity and impracticality of transporting large sums of cash over long distances, money traders started using promissory notes. In the beginning, these were personally registered, but they soon became a written order to pay the amount to whoever had it in their possession. These notes are seen as a predecessor to banknotes by some but are mainly thought of as proto bills of exchange and cheques.De Geschiedenis van het Geld (the History of Money), 1992, Teleac, p. 96 The term "bank note" comes from the notes of the bank ("nota di banco") and dates from the 14th century. It originally recognized the right of the holder of the note to collect the precious metal, usually gold or silver, deposited with a banker via a currency account.
In the 14th century, it was used in every part of Europe and in Italian city-state merchants colonies outside of Europe. For international payments, the more efficient and sophisticated bill of exchange ("lettera di cambio"), a promissory note based on a virtual currency account (usually a coin no longer physically existing), was used more often. All physical currencies were physically related to this virtual currency. This instrument also served as credit.
Birth of European banknotes
The shift toward the use of these receipts as a means of payment took place in the mid-17th century during the price revolution, when relatively rapid gold inflation was causing a re-assessment of how money worked. The goldsmith bankers of London began to give out the receipts as payable to the bearer of the document rather than the original depositor. This meant that the note could be used as currency based on the security of the goldsmith, not the account holder of the goldsmith-banker. The bankers also began issuing a greater value of notes than the total value of their physical reserves in the form of loans, on the assumption that they would not have to redeem all of their issued banknotes at the same time.
This was a natural extension of debt-based issuance of split tally sticks used for centuries in places like St. Giles Fair. Done in this way, it was able to directly expand the expansion of the supply of circulating money. As these receipts were increasingly used in the money circulation system, depositors began to ask for multiple receipts to be made out in smaller, fixed denominations for use as money. The receipts soon became a written order to pay the amount to whoever had possession of the note. These notes are credited as the first modern banknotes.
The first short-lived attempt at issuing banknotes by a central bank was in 1661 by Stockholms Banco, a predecessor of Sweden's central bank, Sveriges Riksbank. These replaced the copper-plates being used instead as a means of payment. The peculiar circumstances of the Swedish coin supply were what led to this banknote issue. Cheap foreign imports of copper had forced the Crown to steadily increase the size of the copper coinage to maintain its value relative to silver. The heavy weight of the new coins encouraged merchants to deposit it in exchange for receipts. These became banknotes when the manager of the bank decoupled the rate of note issue from the bank currency reserves. Three years later, the bank went bankrupt after rapidly increasing the artificial money supply through the large-scale printing of paper money. A new bank, the Riksens Ständers Bank, was established in 1668, but did not issue banknotes until the 19th century.
Permanent issue of banknotes