The Rise of Paper Money: Shaping Economies Across Centuries

By Bhupendra Thapa

Paper money is now a familiar part of everyday life. People use banknotes to buy food, pay for services, and conduct business. Issued by authorised monetary institutions, modern banknotes make transactions easier than carrying large quantities of metal coins. Yet the development of paper money was neither simple nor immediate. It involved centuries of experimentation, financial difficulties, and efforts to maintain public confidence.

The history is more interesting than the familiar story that China invented paper money and the rest of the world eventually adopted it. Early Chinese merchants used paper instruments to make trade more convenient, governments later introduced circulating banknotes, and European banks developed their own systems several centuries afterwards. Along the way, some monetary systems experienced inflation and lost public confidence. These experiences offer useful lessons for understanding the money we use today.

The real starting point: Tang Dynasty "flying money"

During China's Tang dynasty (618–907), merchants faced a practical problem when conducting business over long distances. Carrying large quantities of bronze coins was inconvenient and created security risks. To make financial transfers easier, merchants began using instruments known as feiqian, commonly translated as "flying money" or "flying cash".

These instruments allowed merchants to deposit money in one location and arrange to receive an equivalent amount elsewhere. Rather than transporting all their coins themselves, they could use written records to facilitate the transfer. This arrangement resembles some functions of modern remittance services, although the institutions and procedures were very different.

It is important to distinguish these early instruments from modern banknotes. Feiqian primarily helped transfer claims to money; it was not the same as a widely circulating currency used for ordinary purchases. Nevertheless, it demonstrated how written documents could make financial transactions easier.

In my view, this development matters because it shows that the history of paper money began with a practical commercial need. Merchants wanted a safer and more convenient way to move value. Paper offered a solution that metal coins could not provide as efficiently over long distances.

The real breakthrough: Song Dynasty jiaozi, 1024 AD

The Northern Song dynasty (960–1127) brought paper currency much closer to its modern form. In Sichuan, where iron coins were widely used, private merchants began issuing paper notes called jiaozi during the 990s or around the beginning of the eleventh century. These notes could be exchanged for coins and gradually became useful for local commercial transactions.

The government took over the issuance of jiaozi in 1024 after problems emerged with the private system. This date is widely recognised as a major milestone in the history of government-issued paper currency. Under official management, the notes became an accepted means of payment in Sichuan and helped reduce the difficulties associated with handling heavy iron coins.

The change was important because the notes were no longer simply private documents used to settle particular transactions. They became part of a more organised monetary arrangement that supported both public and private payments. Government involvement also created a framework for managing their issuance and exchange.

However, the jiaozi system was initially regional rather than a single currency circulating throughout China. Its development also depended on the government's ability to maintain confidence in the notes. The experience shows that successful financial innovation requires more than a useful idea. It also needs institutions capable of supporting its practical use.

The part every history of paper money has to include: it broke, repeatedly

The early success of jiaozi did not guarantee lasting monetary stability. The Song government faced difficulties when the amount of paper currency issued exceeded what the system could reliably support. Problems with issuance and redemption weakened confidence, while excessive currency creation contributed to the depreciation of notes and rising prices.

The monetary system evolved through several stages. In 1105, the Northern Song government introduced another form of paper currency called qianyin. After the Song court moved south in 1127, the Southern Song government developed additional paper currencies, including huizi. These changes were not a single, straightforward replacement of one currency by another; they reflected continuing attempts to manage money and government finances.

The problem was not limited to the Song dynasty. The Jin dynasty (1115–1234) also used paper currency, while the Mongol-led Yuan dynasty (1271–1368) eventually developed a much broader paper-money system. Research by Guan et al. (2024) finds that the Yuan initially strengthened its monetary arrangements through a silver standard. However, persistent fiscal pressures later weakened that framework. Military spending, particularly during civil conflict, contributed to excessive issuance and periods of high inflation.

These experiences can be compared with monetary crises in other parts of the world. During the American Revolution, the Continental Congress issued paper money to finance the war. Revolutionary France later issued assignats, while Germany experienced severe hyperinflation in the early 1920s. The causes and circumstances differed, but these cases illustrate how governments can undermine monetary confidence when financial pressures lead to excessive issuance or when the public loses faith in the currency's future purchasing power.

It would be inaccurate to conclude that printing paper money automatically causes inflation. Modern economies rely on paper and digital money without necessarily experiencing monetary collapse. Inflation depends on several factors, including money supply, production, demand, expectations, and government policy. The historical lesson is that monetary expansion becomes dangerous when it is poorly managed and weakens confidence in the currency.

In my assessment, the most revealing part of this history is the difference between introducing a currency and maintaining its value. The Song and Yuan experiences show that even a useful monetary innovation can face serious difficulties when government finances and currency issuance are not managed effectively.

Why it took Europe roughly 600 years to catch up

Europe adopted banknotes much later than China. In 1661, Stockholms Banco in Sweden issued what the Sveriges Riksbank identifies as Europe's first real banknotes. The notes became popular partly because Sweden's heavy copper coins were inconvenient to handle. Unlike earlier deposit certificates, these banknotes could be issued as loans and used to make purchases.

The experiment did not end successfully. Stockholms Banco issued more notes than its arrangements could safely sustain, and difficulties involving redemption and confidence contributed to its failure. The bank's collapse demonstrated that a payment instrument could be useful to the public without being financially sustainable.

The Bank of England, founded in 1694, later became an important institution in the development of British banking and banknotes. However, it was not the first European institution to issue paper currency. Sweden had already experimented with banknotes several decades earlier.

Why did China develop paper currency so much earlier? There was no single reason. China had established paper production and printing techniques, while its commercial conditions created a strong demand for more convenient payment methods. In Europe, monetary practices developed through different combinations of banking institutions, political arrangements, trade, and public acceptance.

It would be too simplistic to suggest that Europe lacked commercial activity or that technology alone explains the delay. Societies adopt financial innovations when the benefits, institutions, and economic conditions make them practical. China's early experience and Sweden's later experiment demonstrate two different paths towards a similar objective: making transactions easier without undermining confidence in money.

The thread connecting a thousand years to today

Modern money has evolved considerably from the paper instruments used in China. Most contemporary banknotes are fiat money, meaning they are not generally redeemable for a fixed quantity of gold or silver. Their acceptance is supported by legal arrangements, monetary institutions, public confidence, and their usefulness in settling payments.

Trust is important, but it is not the only factor determining a currency's value. Inflation, interest rates, economic growth, fiscal policy, and expectations about future conditions all influence how people value money. A credible monetary framework helps people believe that their currency will remain useful for everyday transactions and financial planning.

The shift from physical cash to digital payments offers a useful comparison with earlier changes in monetary history. Sweden, the country associated with Europe's first banknotes, has become one of the world's most digitalised payment markets. According to the Sveriges Riksbank's 2026 Payments Report, only 5% of survey respondents said they had used cash for their most recent in-store purchase in 2025, compared with 10% in 2023 and 40% fifteen years earlier. These figures measure respondents' reported payment methods for their latest in-store purchase, not the share of all payments made with cash.

This change reflects the growing convenience of cards and mobile payments. However, a decline in cash use does not mean that cash has lost all its value or that a completely cashless society is necessarily desirable. Digital payments depend on electricity, communications networks, devices, and secure systems. People who lack access to these services may also find it difficult to participate in an increasingly digital economy.

The comparison with historical paper money is useful, although the technologies are different. Chinese merchants wanted to avoid transporting heavy coins, while modern consumers often prefer not to carry banknotes. Both developments respond to the desire for more convenient transactions. Yet every new payment method creates its own questions about security, access, reliability, and the institutions responsible for maintaining confidence.

In my view, the important connection between these periods is not that paper money and digital payments are identical. It is that each changes how people transfer value and which systems they must rely on. The technology evolves, but the need for a reliable means of payment remains.

What this means in practice

The history of paper money is not a straightforward account of continuous progress. It includes useful innovations, financial experiments, periods of instability, and efforts to restore confidence. Tang dynasty remittance instruments helped merchants move value, Song dynasty jiaozi developed into government-issued currency, and European banknotes emerged through a different set of commercial and institutional conditions.

These examples show why the introduction of money must be distinguished from the management of a monetary system. A currency may make transactions easier, but its long-term usefulness depends on credible institutions, sound monetary management, and public acceptance. When government financing pressures weaken these arrangements, even an established currency can lose purchasing power.

The same principle matters as payments become increasingly digital. Electronic transfers and mobile payments can make transactions faster and more convenient, but they also require secure infrastructure and broad public access. An efficient payment system should therefore do more than encourage people to abandon cash. It should remain reliable during disruptions and provide workable options for people who cannot easily use digital services.

The main lesson is that financial innovation creates opportunities as well as responsibilities. Governments, banks, and payment providers must adapt their safeguards as the way people use money changes. The success of a monetary system should be judged not only by the convenience of its technology but also by its ability to support stability, accessibility, and confidence over time.

The lesson behind a thousand years of monetary change

What I find most striking about the history of paper money is that convenience has repeatedly encouraged people to adopt new ways of handling value, but convenience alone has never guaranteed success. Chinese paper currency helped address the difficulties of using heavy coins, yet some systems later suffered from excessive issuance and declining confidence. Sweden's experience in the seventeenth century offers a similar warning: banknotes were useful, but the institution issuing them still needed to manage its obligations responsibly.

These comparisons should not be treated as proof that every new form of money will eventually fail. Modern monetary institutions operate under different economic, legal, and regulatory conditions. Nevertheless, historical experience shows why the management of money deserves as much attention as its invention. Monetary stability requires more than producing notes or introducing a faster payment system.

Sweden provides an interesting link between the past and present. The country that issued Europe's first banknotes now relies heavily on digital payments. This is not evidence that paper money has become obsolete everywhere, nor does it mean digital money faces exactly the same risks as historical banknotes. Instead, it shows how the form of money can change as technology and consumer preferences evolve.

My view is that the future of money will depend on how well institutions manage this transition. Digital payments can improve convenience and efficiency, but their long-term success also requires security, resilience, and inclusion. The history of paper currency reminds us that people need more than a convenient way to pay. They need confidence that the system will work when they depend on it. That responsibility remains just as important today as it was when the first government-issued jiaozi appeared in China.

Sources

Guan, H., Palma, N., & Wu, M. (2024). The rise and fall of paper money in Yuan China, 1260–1368. The Economic History Review, 77(4), 1222–1250. https://doi.org/10.1111/ehr.13305

Sveriges Riksbank. (n.d.-a). 1661: First banknotes in Europe. https://www.riksbank.se/en-gb/about-the-riksbank/history/historical-timeline/1600-1699/first-banknotes-in-europe

Sveriges Riksbank. (2026). Payments report 2026. https://www.riksbank.se/en-gb/payments--cash/payments-in-sweden/payments-report-2026/

von Glahn, R. (2026). Northern Song monetary policy and the invention of paper currency in Sichuan. In The rise and demise of paper money in imperial China: Fiscal innovation, market growth, and monetary transitions, c. 1000–1500 (pp. 113–146). Cambridge University Press. https://doi.org/10.1017/9781009699440.007