China developed the first paper money, in the 7th Century, during the Tang dynasty. It was nearly 1,000 years later that paper money appeared in Europe, when Sweden issued the first European bank notes.
It’s thought that paper money was invented by Chinese merchants in an attempt to lighten the weight of all the coins they were carrying around. They used to exchange coins for a certificate issued for the value of the coins. And this is how our cash system still works today. A £10 note doesn’t have any intrinsic value, it’s simply a promise to pay the bearer on demand the sum of £10. It’s the basis of our modern banking system.
The early Chinese system of certificates carried on for 200 years. The paper notes were nicknamed “flying money” because they tended to fly off in a strong breeze.
Overproduction of the Chinese bills and a copper shortage in the country led eventually to inflation. The government had to act so they decided to issue paper notes backed by gold reserves. Thus came about the world’s first legal tender.
Yuang dynasty banknote and printing plate, c 13th century.
The Bank of England was founded in 1694 to raise money for William III’s war against France. Early Bank of England notes promised to pay the bearer on demand and could be redeemed for gold or coins. If the bearer only wanted to cash in part of the bill, the amount withdrawn would be endorsed on the note.
Early notes were handwritten on special bank paper, then signed by a cashier. It’s astounding to us these days with computers and huge sums being moved around every second, that it all started out with handwritten bank notes.
The Bank of England website goes into far more detail about the history of the UK bank notes and it makes interesting reading for anyone who wants to know more about paper money.