The History of Banknotes

When we think of money nowadays, especially “big money,” banknotes immediately spring to mind—piles and piles of them sometimes—while coins hold only a secondary position as the “change,” the stuff you use for the small, insignificant items of life. But things were not always this way. If you think about it, a piece of stamped paper does not inherently hold sufficient value or prestige to explain the central position it has come to occupy in our financial dealings. So how did banknotes come to dominate world trade?

The answer lies in the Far East, and in 7^th-century China ruled by the Tang Dynasty to be precise. The idea of banknotes originally surfaced as a form of I.O.U, a note promising payment of a certain amount of precious metal to someone at a later date. But it was not until the year 812 CE that banknotes attained a widespread use in China, due to a shortage of copper. The new form of payment was called “flying money” on account of its lightness, and by the year 970 CE it became the dominant monetary unit of the Chinese economy. The oldest banknote in existence today dates to the 14^th century and depicts a pile of coins on it as proof of its value for the illiterate.

The Western world was slow to pick up on this clever way of completing trades and continued to carry heavy coins and unwieldy barter items for many more centuries. Famous travellers of the 13^th century such as Marco Polo and William of Rubruck explain the phenomenon of paper money they encountered in the East with great amazement. Marco Polo dedicates a whole chapter to paper money in his book and notes how “these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver.”

But it was not until 1483 that paper money was first issued in Europe, and even then only as emergency money: notes promising a later payment, rather than items of free exchanged as current money. It took nearly two more centuries for a bank to print the first official paper with Sweden taking the initiative in 1661. The Swedish bank issued credit paper as a temporary replacement to the very heavy and quickly devaluing copper-plate money the country used at the time. The Bank of England was the first one to print banknotes as current money in 1694, and the innovation made it the most influential bank in the world at the time. In the 18^th and 19^th centuries companies experimented with the production and processing of the special paper, and it was not until the 19^th century that banknotes began circulating in the rest of the European states.