Over the past two thousand years, commerce has transitioned from using metal coins as the principal medium of exchange to using paper banknotes. Paper currencies started off as peculiar local institutions, often conceived as a type of debt obligation, and served as stand-ins for actual coins. Today, they have become the universal norm and are backed by no precious commodities at all. Rather than being a proxy for ‘real’ money, paper banknotes are now bona fide money themselves.

           While paper banknotes issued by institutions looking like modern banks came about in Europe in the 17th century, paper money in general dates back even further. Post-classical (Medieval) China is often credited with inventing paper money, which was born in the period spanning the 9th to 11th centuries, and evolved further from there. While the specifics of its creation are unique to China, at a high level, the reason for the increased use of paper money at the expense of metal coins is not; paper money solved real problems associated with metal coins. 

Coinage in Tang Dynasty (唐朝) China

           The invention of paper money dates to the Tang Dynasty in China, which lasted from the 7th to early 10th centuries. The principal currency used in those days were copper coins, some of which were made of a mix of copper and nickel and therefore rusted blue like in the example below. They were all round with square holes in the center, enabling them to be bound together for storage. These coins were simply designed; the obverse side of the coin below was blank.

           China did not produce coins with gold or silver for most of its history; metals used in minting coins tended to be more common substitutes like copper, zinc, and iron. One practical limitation of these copper coins was that they tended to be worth relatively little individually; it took many coins to make ordinary purchases, but that limitation is not what brought about the earliest examples of Chinese paper money.

           In the 8th century, Yang Yan (楊炎), a chancellor to the Emperor Dezong of Tang (唐德宗), suggesting expanding taxation to merchants who were not previously taxed as landowners and peasants were. This reform, when approved, also meant that the portion of taxes payable in currency rose relative to taxes payable in kind. Previously, farmers would pay their taxes with commodities they produced, including grain, an arrangement that would work better for farmers than for merchants. This reformed and expanded taxation meant increased demand for currency and helped to create a shortage of metal coins.

           The Tang Dynasty sought to tackle this problem by decree. The shortage would be addressed initially by requiring merchants to use commodities like silk as mediums of exchange instead of coins, a requirement that would hinder trade. Even the use of copper in products like bronze statues and kitchen utensils was banned to divert the metal for use in minting coins. This also prevented people from melting coins down to make such wares whenever the currency’s buying power fell below its value in raw metal. It may seem like a primitive response, but note that in 1933, the American President Franklin D. Roosevelt limited private ownership of gold for quite similar reasons.

           Simply put, there was a shortage of currency. This is a common problem of monetary approaches that use only metal coins as currency; their availability is not at all correlated with their demand. This limitation was a typical driver for using paper money, even in other societies in later centuries. In China at least, the shortages would even impact burial customs. Take the curious case of burial money, coins buried with the dead to pay for entrance into whatever new world they were entering. The popularity of paper money, soon to be introduced, could be traced by tracking the relative frequency of metal coins and paper currency found in tombs.

Flying Money

           Besides limiting the use of copper and the ability of merchants to trade with metal coins, the Tang Dynasty came up with other solutions for the currency shortage, solutions which were no doubt better. Around the year 800, midway through the Tang Dynasty’s rule, government-issued paper money started to appear. These paper notes were used as a kind of debt instrument the government would use to pay merchants in the frontier regions of China.

           Of course, debt instruments are not currencies. However, these notes, which were redeemable for metal coins in the Tang Dynasty’s capital Chang’an (長安), traded as though they were a currency. The merchants operating on the frontier, whose use of metal coins was already discouraged by earlier decrees, saw a practical replacement in this new paper currency. These paper notes were called “flying cash” (飛錢) because they had a tendency to blow away it the wind, unlike their metal alternatives.         

The Song Dynasty (宋朝) and Modern Money

           However, even by the end of the Tang Dynasty, paper money was by no means ubiquitous. It was still an oddity intended for a specific purpose and place. The use of paper currency as a universal norm would come with the next dynasty, the Song Dynasty, which reigned from 10th to the 13th centuries, following a period of disorder known as the Five Dynasties and Ten Kingdoms period. 

           The next chapter in the story of paper money centers around Szechuan paper banknotes called jiaozi (交子). They were a local currency introduced privately by merchants and financiers in Szechuan (四川), in southwestern China, for conducting local business. The introduction of these notes was also partly due to peculiar state decrees. The Song Dynasty was concerned about currency leaving the country and Szechuan was on the empire’s frontier. As such, the imperial government sought to block valuable metal coins falling into foreign hands. Their response was an unusual and rather heavy-handed rule. The Song Dynasty required that Szechuan use iron coins.

           The idea was that iron was not precious enough to bother worrying about outflows of currency. The downside was that each iron coin was of very little value by itself. Iron coins were heavy relative to their buying power and were not particularly practical for trade. As such, the earliest paper jiaozi were issued in high denominations, where use of physical coins was particularly problematic. Like the Tang Dynasty’s “flying cash” and even early western banknotes, the jiaozi started off as debt instruments of sorts. Jiaozi were supposed to be a temporary means of payment with the bill being settled later in the more familiar coins at a time that was more convenient for both parties. However, their convenience meant the jiaozi were essentially replacing the heavy iron coins altogether. The paper notes even traded at a premium to their equivalent amount in metal coins.

           The jiaozi looked somewhat like modern banknotes too. Unlike the austere design of the old coins, they had illustrations, as the example below shows. The paper notes would feature pictures of things like houses and trees as well as images of people. They were also printed with color inks and carried seals and other special marks to prevent counterfeiting.

           It is important to remember that the jiaozi were issued by private entities with a specific local purpose. However, the Song Dynasty government was about to notice the potential for this new kind of currency. China’s authorities started off by regulating this new form of currency but then got into the business of printing paper money themselves. In time, the printing of paper notes would become a government monopoly. This did enable them to be put to more widespread use. The Song Dynasty’s paper money would be found everywhere, not just in Szechuan. The currency would be accepted as a means of payment in government shops selling salt or liquor, commodities supplied only by the state.

           Of course, this was not yet fiat money; the notes were still backed by metals. However, the link to metals was broken over time. With this came a familiar problem of paper money, persistent inflation. After it started being printed by the state in the 11th century, the jiaozi had been devalued substantially; the notes were trading at just 10% of their old value within a few decades.


           Nonetheless, outsiders would come to see the utility of paper money. Paper currency was still relatively unknown to Europe in the 13th century when the Venetian explorer Marco Polo visited China. He commented on what he saw as the peculiar practice of transforming ordinary paper into money.

“In this city of Kanbalu is the mint of the Great Khan, who may truly be said to possess the secret of the alchemists, as he has the art of producing money … the coinage of this paper money is authenticated with as much form and ceremony as if it were actually of pure gold or silver … it receives full authenticity as current money” – Marco Polo in “The Travels Of Marco Polo”


            From counterfeiting to inflation, the problems associated with paper money were all experienced when China first started dabbling in this new monetary order a thousand years ago. These issues did not halt the advance of paper currency and the concept was copied the world round. In China, the forces driving the adoption of paper money may have superficially appeared unique to that country in that era, with its rules and its customs. However, interpreted more generally, the problems are modern ones too, from the currency shortages of the Tang Dynasty to the outflows of money feared by the Song Dynasty. These are modern monetary problems concerning the regulators of currency and coinage today, and they will be for the foreseeable future. However much societies advance, the core issues facing monetary and financial stability remain, sometimes little changed.   

Further Reading

1.     Boeykens, Coralie. “Paper Money, a Chinese Invention?” Museum of the National Bank of Belgium, National Bank of Belgium, 5 Sept. 2007.

2.     “Chinese Paper Money.” Silk Road, www.silk-road.com/artl/papermoney.shtml.

3.     Harford, Tim. “How Chinese Mulberry Bark Paved the Way for Paper Money.” BBC News, BBC, 11 Sept. 2017.

4.     Theobald, Ulrich. “Feiqian 飛錢, Bills of Exchange.” Feiqian 飛錢, 10 May 2016.

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