Paper money

• 1. Introduction

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  Paper money began as a written promise long before it became a physical form of currency, and the earliest surviving trace of that promise sits in the Code of Hammurabi, law 100, dated to around 1755 to 1750 BC, which laid out a fixed repayment schedule between a debtor and creditor in written contractual terms. Paper money, often called a note or a bill, is formally a negotiable promissory note payable to the bearer on demand, and it comes in two main forms: government notes, issued directly by political authorities, and banknotes, issued by banks. It is often, though not always, legal tender, meaning courts must recognize it as valid payment of a debt. From the very beginning, counterfeiting has trailed the idea as an inherent challenge, driving centuries of advances in security printing. Where did the leap from a written promise to a piece of paper that anyone would accept as money actually happen, and how did governments eventually take control of the process?

• 2. Written Promises Before Paper

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  Three more laws in the Code of Hammurabi follow the same instinct for documented proof. Law 122 required anyone depositing gold, silver, or other movable property for safekeeping to present a signed contract of bailment to a notary before handing it to a banker. Law 123 cleared a banker of liability if that notary later denied the contract had existed, and Law 125 held a banker responsible for replacing any deposit stolen while in their possession. Centuries afterward, Carthage is thought to have issued government notes on parchment or leather before 146 BC, possibly making it the oldest known user of lightweight promissory notes. In China, promissory notes made of leather appeared during the Han dynasty as early as 118 BC. Rome, too, may have used a similarly durable, lightweight substance for promissory notes around 57 AD; examples have since turned up in London. Cash paper money itself began as a receipt for value already held on account, described at the time as value received, a concept distinct from promissory sight bills, which instead promised to convert into value only at some later date.

• 3. China's Flying Money

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  Before paper notes existed, merchants strung circular Chinese coins, each cast with a square hole in the center, along a rope for carrying to market; when those strings grew too heavy for large transactions, a trusted keeper would hold the coins and hand back a paper receipt recording the deposit, redeemable for the coins again later. The first documented paper money grew directly out of that practice in China during the Tang dynasty, which ran from 618 to 907, when merchants and wholesalers began issuing these receipts of deposit, nicknamed flying money, to avoid hauling heavy strings of copper coinage through large commercial transactions. Centralized, government-issued paper money took longer to arrive: by the 11th century, under the Song dynasty, these merchant receipts had evolved into true paper currency known as jiaozi. The Song government, short of copper for striking coins by 960, began issuing the first generally circulating notes as a promise to redeem them later for specie. The state soon recognized the advantage of controlling this new form of money, granting a monopoly over note issue to several licensed deposit shops, and by the early 12th century the notes issued in a single year amounted to some 26 million strings of cash coins. By the 1120s, the government was printing its own state-issued paper money using woodblock printing, running factories in the cities of Huizhou, Chengdu, Hangzhou, and Anqi; records from 1175 show the Hangzhou factory alone employing more than a thousand workers a day. Early notes were valid for only three years and limited to specific regions, but between 1265 and 1274 the southern Song government introduced a national paper currency backed by gold or silver, worth anywhere from one string of cash to as much as one hundred, lifting that geographic restriction entirely. After 1107, the government printed notes in as many as six ink colors with intricate designs specifically to combat counterfeiting. Kublai Khan, founder of the succeeding Yuan dynasty, issued his own paper money known as Jiaochao; faced with a shortage of specie, his government eventually removed the restrictions on how long the notes remained valid, and the fact that the state stood fully behind this paper currency deeply impressed the Venetian merchants who encountered it.

• 4. The Idea Reaches Europe

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  According to a 960 travelogue by Ibrahim ibn Yaqub, visitors to Prague found small pieces of cloth being used as a medium of trade, each carrying a set exchange rate against silver. Around 1150, the Knights Templar began issuing notes to pilgrims, who deposited valuables at a local Templar outpost before setting out for the Holy Land and received a document recording the value of that deposit, redeemable for funds once they reached the Templar treasury there. Word of actual Chinese paper money reached Europe in the 13th century through travelers including Marco Polo and William of Rubruck; Marco Polo devoted a chapter of The Travels of Marco Polo to describing how Kublai Khan caused the bark of trees, made into something like paper, to pass for money all over his country, writing that everybody takes them readily, for wheresoever a person may go throughout the Great Kaan's dominions he shall find these pieces of paper current. In medieval Italy and Flanders, money traders began using promissory notes to avoid the danger of transporting large sums of cash over long distances; these notes evolved from personally registered instruments into written orders payable to whoever held them. The term bank note itself, from the Italian nota di banco, dates to the 14th century and originally recognized the holder's right to collect the precious metal, usually gold or silver, deposited with a banker.

• 5. From Goldsmiths To Bankruptcy

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  Paper money's own reputation evolved gradually. Early notes were seen as a kind of I.O.U., a promise to pay the bearer in precious metal on demand, what economists call representative money, yet Londoners readily accepted them for their convenience and security from the late 1600s onward; only once precious metals were gradually stripped out of the monetary system entirely did paper money evolve into pure fiat money. That shift toward paper as everyday payment took hold in London during the mid-17th century price revolution, a period of rapid gold inflation that forced a rethink of how money worked. Goldsmith bankers there began issuing deposit receipts payable to whoever held the document rather than only the original depositor, meaning the note's value now rested on the goldsmith's security rather than any particular account holder. Those same bankers soon issued more notes in loans than they actually held in reserve, betting that depositors would never all demand redemption at once, a natural extension of the debt-based tally-stick system that had circulated for centuries at places like St. Giles Fair. The first attempt at issuing banknotes through a central bank of issue came in 1661, from Stockholms Banco, a predecessor of Sweden's Sveriges Riksbank. The bank's notes replaced unwieldy copper-plate money that had grown heavy because cheap foreign copper imports had forced the Swedish Crown to keep enlarging its copper coins to hold their value against silver. Barely three years later, Stockholms Banco went bankrupt after rapidly expanding the money supply through large-scale over-printing of its notes. A successor, the Riksens Standers Bank, was founded in 1668, but it did not issue its own banknotes until the 19th century.

• 6. Governments Make It Official

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  Economist Nicholas Barbon captured the new thinking behind banknotes when he wrote that money was an imaginary value made by a law for the convenience of exchange. Sir William Phips put that idea into practice as governor of the Province of Massachusetts Bay, launching a banknote experiment on the 20th of December 1690 to help fund a war against France; the other Thirteen Colonies soon followed with their own bills of credit, a related but distinct form of paper currency, and by the 1760s such bills accounted for the majority of colonial transactions. The Bank of England, established in 1694 to help fund a war against France, became the first bank to issue banknotes permanently, starting in 1695 with a promise to pay the bearer the note's value on demand; those early notes were handwritten for precise amounts, and only by 1745 had the bank moved to standardized printed denominations ranging from 20 to 1,000 pounds, with notes that no longer required a handwritten payee name and cashier's signature first appearing in 1855. The Bank of Scotland, founded in 1695 to support Scottish businesses, became the first European bank to issue fixed-value banknotes in 1696 and still holds the record for the longest continuous banknote issue in the world. In France, the Scottish economist John Law helped establish banknotes as formal currency after wars under Louis XIV had drained the country's supply of precious metal for coinage. In the United States, early attempts to establish a central bank in 1791 and 1816 both failed, and the federal government did not begin printing its own banknotes until 1862. Britain formalized the legal status of paper money through the Bank of England Act of 1833, which made banknotes legal tender in peacetime. Until then, commercial banks across England could still issue their own notes, and currency from provincial banking companies was the everyday money everywhere outside London; the Bank Charter Act of 1844 ended that patchwork by restricting new note issue to the Bank of England alone, requiring any new notes to be backed either entirely by gold or by up to 14 million pounds of government debt, a restriction that gave the Bank sole control of the money supply by 1921 and an outright monopoly over the note issue by 1928.

• 7. What Paper Money Costs

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  Extremely sophisticated forgeries known as superdollars have turned up in recent years, proof that counterfeiting has only grown more advanced alongside color photocopiers and computer scanners. Paper money otherwise trades weight for durability against coins: banknotes are far lighter to carry, but also far less durable, and a note issued by a commercial bank carries counterparty risk, the chance the issuing bank cannot make good on it, while even central bank notes once carried a theoretical risk when backed by gold or silver reserves. Gold coins recovered from centuries-old shipwrecks often retain nearly all of their original appearance, while silver coins slowly corrode, and both notes and coins remain equally exposed to inflation. Before national currencies and efficient clearing houses existed, banknotes could typically be redeemed at full face value only at the specific bank that issued them; other branches discounted them by an amount that grew with distance from the issuing bank and with how safe that bank was perceived to be, and a failed bank might redeem its notes only partially from reserves, or not at all. Coins and notes also differ in hidden costs: coins require industrial manufacturing and metal alloys for hardness, while paper or polymer notes are cheaper to print but wear out faster, forcing the issuing bank to replace them at its own expense; coins are more costly to transport in bulk despite requiring less scrutiny to authenticate, while banknotes are cheaper to move in large denominations but carry their own cost of checking security features and confirming the issuing bank's standing.

• 8. A Collector's Market

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  Collecting paper money, known formally as notaphily, remained a small offshoot of coin collecting until the 1990s, when currency auctions and growing public awareness began pulling in more interest and higher prices for rare notes. The most valuable note ever sold, a $1,000 bill issued in 1890, fetched $2,255,000 at auction. Where the hobby once ran through a handful of mail-order dealers issuing price lists and catalogs, illustrated auction catalogs at coin and currency shows fueled a sharp rise in awareness during the early 1990s, and third-party grading services, similar to those used for coins, further boosted collector and investor interest; single auctions today can generate millions of dollars in gross sales, and eBay now handles a higher volume of banknote sales than traditional auctions, even as rare notes still sell for far less than comparable rare coins. The International Bank Note Society counts around 2,000 members across 90 countries. The same familiarity that drives collecting also drives novelty: manufacturers print banknote patterns onto clothing, bed linens, curtains, and upholstery, and mold them into paperweights, toilet seats, and even stacks of fake bills used as makeshift seating. To avoid being treated as counterfeiters, these manufacturers typically overlap note images or resize reproductions to at least 50 percent smaller or larger than the original; a novelty seat built from a lifelike decal, however, only clears that risk once the decal has been permanently affixed and can no longer be peeled away.