Which country was the first to use paper money as medium of exchange?

Necessity, as they say, is the mother of invention – and so it was in the case of paper currency. China invented paper money during the Song Dynasty in the 11th century CE.

The first known use of money can also be attributed to China. A cast copper coin was discovered at a Shang Dynasty tomb, which can be dated from the 11th century BCE. Metal coins, be it silver, gold, or other metals, have been widely used around the world for means of trade and value. They have certain advantages of being handy, being durable, and harder to counterfeit. However, the pitfall of using them is that they can get very heavy and hard to carry, especially if you have lots of them.

For thousands of years after the Shang Dynasty tomb coins, traders, merchants, and consumers for China had to bear carrying those coins for bartering commodities for other items directly. Coins then featured square holes at the center so that they could be tied and carried using strings. For bigger transactions, the unit of measurement then shifts to the number of coins strings. While the system was viable, it was a cumbersome experience for the early people of China.

Luckily, here came the Tang Dynasty in 618-907 CE, when merchants started to deposit those weighty string of coins onto a reliable official. The official would then document how much coins the merchant has left and written it in a piece of paper. It serves a promissory note, which then could be bartered for commodities. The seller could then reach out to the agent and swap the note for the coins. With the new practice, everything became significantly easier. However, these were privately-produced banknotes and could not be exchanged between individuals, nor it was open for use publicly. Thus, they weren’t considered as genuine paper currency.

The first actual examples of paper money, like how we use it today was actually created in the Song Dynasty during 960-1279 CE. Jiaozi, a form of a promissory note, was developed by a pool of merchants in Sichuan at the time of Emperor Zhenzong. These banknotes were tradeable of coin-based money and could also be swapped between different individuals.

Each paper money was about the size of a current US letter (A4 paper) and was designed with a copper-plate-inscribed pastoral background with images of coins and a note warning about forgery. They were inscribed with hand-written value and red ink stamps to indicate genuineness and validity. Sadly, no actual sample of the said paper currency was found, but archeologists were able to recover one sample of printing plate they used for creating the banknotes, dating back around 1023 CE.

The paper money became very popular. The central and provincial administration gave license to various shops in each town and allowed people to swap their coin money for the paper currency. Some few years later, the government took the responsibility in their own hands and made it an administrative affair. They print the money and distribute it to the system, no longer having the need to go through different channels.

With the rise of paper money, factories were established in Huizhou, Hangzhou, Anqi, and Chengdu. Since then, paper currencies were printed using a particular approach, such as blending a variety of fibers to avoid counterfeiting of the money. Stamps were also dipped in an array of hues to determine the expiry of the banknotes.

However, the use of the ‘Jiaozi’ was stopped as China fell to the Mongols. The Mongol Yuan Dynasty, spearheaded by Kublai Khai, released its own version of paper money called the ‘Chao.’ Marco Polo, who stayed 17 years in Kublai Khan’s court, was fascinated by the system having a government-backed banknote. Truth to be told, the paper money was never really backed by silver or gold. The Yuan Dynasty printed and released too much amount of the paper currency, resulting in inflation, which remained unsettled until the Yuan dynasty’s downfall in 1368 CE.

While the following Ming Dynasty also started producing their own unbacked paper currency. However, it halted the program in 1450 CE. The dynasty tried to print paper money again on the last two years of its reign to stave off the anarchist Li Zicheng, but the attempt became unsuccessful. It was only until the 1890 CE when the Qing dynasty started producing China’s current national currency, the ‘Yuan.’

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