The History Of Paper Money

Posted by Allison on 6 April 2009, 15:10

When we receive a banknote in our change today we hardly give it a second thought.  But the banknotes we are used to – with their complex mix of anti forgery protection and detailed drawings of objects and people relevant to their country of issue – first made an appearance hundreds of years ago, as an answer to the problem of carrying around lots of coins on your person.

It seems logical that the country who invented paper should also be the first country to think up the idea of banknotes.  China can take this honour, and it was indeed because some of its richest citizens were getting fed up with carrying around huge strings of coins with them.  The early Chinese coins were made with holes in them (this design can still be seen in some currencies today) but even though this made them easier to carry there was still a limit to how much anyone could take with them.

And so paper money was invented to serve a purpose.  But in its early days the banknote was actually designed to be used in two separate forms.  The first was as a receipt, and the second as a bill.  From these humble and limited beginnings came the banknotes we know today.

Over the centuries the use of banknotes of one form or another became more widespread.  They finally started being used in Europe around the year 1661, when Sweden led the way in this new form of currency.  Over the ensuing years other countries in Europe started making their own as well, although it was the eighteenth century before many more countries decided to follow suit.

The History Of Paper Money

The United States weren't far behind either – they created their first banknotes in limited areas in the late 1600s, but it would be nearly another century before the world famous dollar would appear in all its glory., and the Americans would need to wait until 1861 to see banknotes that looked anything like the ones they are familiar with today – the famous 'greenbacks' as they are called.

But banknotes were originally created for reasons other than convenience.  Coins were typically made from various combinations of metals, and as coins had become a widespread means of paying for goods – and indeed were the first proper form of currency to be used all over the world – it was only a matter of time before the metals people used back then to make the coins started to run short.

Rather than having to find another way to make the coins, someone came up with the idea to have paper money instead, as a substitute for the coins.  Nowadays if we carry round a five pound note in our pockets, for example, we know that we can go into a shop and hand over that five pound note in exchange for goods that we want to buy. 

But in the past, paper money first came in as a method of exchanging our coins for a piece of paper that represented the same value of those coins.  As such it was more like an 'I owe you' note than a proper banknote.  But people could go back to the person who was holding their cash for them, hand over their paper money and receive back the same value in coins again whenever they needed them.  In this sense the people who held the money for others were the first bankers – albeit in a very primitive way – and the first banknotes were more like the bank books we keep today, with details of how much money we hold in our bank accounts, that we can then go and withdraw at any time.

You might think that once the idea of paper money had been 'coined', so to speak, people would catch on to it and it would become widespread and as much a part of their lives as it is today.  But that wasn't the case.

It did catch on in some areas – but because paper money didn't work in the same way then as it does now, the notes were so plentiful that they lost all value in some areas.  This led to people becoming disillusioned with them and that was the end of that for many years – centuries, in fact, in some countries.

It's a small wonder that paper money ever made a comeback at all, but it did eventually, and this time it was back for good, and the system we know today gradually came into being and banknotes became commonly used in many countries.

Given their somewhat chequered history, and the fact that credit and debit cards and other ways of paying for goods which don't involve cash are so popular nowadays, one wonders whether the humble banknote will eventually fall into disuse again.  It seems hard to believe that it will, but as more modern means of paying for items rely on the use of a small piece of plastic, there may soon be no need to carry any notes or coins around with us at all.

Paper money has come a long way though.  In the beginning many notes were handwritten, which made them prime targets for people who wanted more money for themselves without having to earn it first.  At the same time the first banknotes were created, so it seems were the first forgers.

As the design and popularity of various banknotes advanced, it became obvious that certain measures would need to be taken to ensure that it became more difficult to forge these notes, and the first automatic printing process for banknotes eventually came into being.

It's certainly true that banknotes would never have caught on in the same way if they were still being hand drawn and written.  The creation of paper money nowadays is highly sophisticated and very different to its early beginnings.  But with that said, the trail that paper money has left throughout history is certainly a fascinating one.