Posted on 2/25/2014

Have you ever wondered how paper money came into existence? PMG Researcher Ethan Bickford takes a look at paper money's history.

Paper money collectors all know and love their collections, and most of them have a pretty good idea of the collection’s origins – especially within the circles in which one collects. But, there has to be a solid beginning somewhere to all of this, right? How and when did humanity start using paper money, and what purpose did it serve? Why make the transition from bartering (“Hey, I’ll trade you two goats for that axe”), to coins, then to paper money and coins?

To better grasp this issue we should probably take a brief look at the origins of money in general – paper money and barter systems aside. In the Near East between 12,000 and 9,000 B.C. obsidian was the general form of currency; as it had great purpose: tool crafting. After that, around 3,000 B.C., humanity made the change over to copper and silver after smelting techniques were discovered. Coinage followed and became used in India, China and Greece from 1,000 – 700 B.C. mostly as an efficient means to conduct trade and pay soldiers.

Now that we’re familiar with the origins of money as a whole lets finally unearth the beginnings of our beloved paper money.

We know this much: coins are heavy. Try walking around with a pocket full of them, it’s pretty uncomfortable. So try lugging crates of them around for commercial trade – no thanks.

Some of the largest, most successful ancient traders were the Chinese under the Tang Dynasty (early 600s - early 900s A.D.). The origins of paper money are in merchant scrip from ancient China. These traders wished to avoid large cargo loads of coinage from region to region because of logistical and security issues; the same issue also existed in medieval Europe and thus a similar system was in use. Credible issuers would create scrip, or promissory notes instead of having to haul loads of coins. This scrip was generally accepted and traded among merchants for goods and services.

It didn’t take long for the central government to notice the economic boon this scrip was giving their trade and during the Song Dynasty in the 11th century deposit shops were created. In the early 12th century the first government-issued paper money was created. The Song Dynasty produced about 26 million strings of cash notes a year. Those in possession of these notes could simply go into a deposit shop and exchange the note for its denomination in coinage; simple and safe.

Shortly after, Europeans with the assistance of accounts from Marco Polo and other adventurers began to catch on to this efficient yet simple monetary system. At this point the symbiotic relationship between coins and paper money was beginning to flourish and develop into what we know today.

The rest is history. Paper money is in use all over the globe, in every nation with the same basic principals that commanded it in ancient times. But now, where will our monetary system head next? Are we traveling towards a total commitment to digital currency? Or, will there always be a place in advanced economies for ancient technologies such as coins and currency? I’d like to think the latter.

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