The Development of Paper Money

The origins of paper money were in China. We do not know a great deal about them, but we do know paper money substitutes go back B.C. A major problem is that ancient Chinese writers were inclined to be fanciful and some histories are strewn with dragons. One numismatic work depicts an “unknown” coin.  The writer, unable to trace any details of its appearance, simply drew pictures of what he thought it should have looked like. Paper money proper seems to have been invented around A.D. 200. The forerunners were leather.

A well recorded example of the use of leather concerns Emperor Wu Ti of the Western Han Dynasty who made an issue of hide money in 119 B.C.  Specially reared white deer were slaughtered for the purpose and their hides cut into squares of one foot, ornamented with floral designs, and marked for various high denominations. They did not circulate as money, however, but were required to be purchased by visiting warlords and subservient rulers making their annual trip to the palace to pay tribute. Having bought them the visitor was expected to present the hidenote to the Emperor as part of his tribute - failure to purchase the hide money was liable to result in beheading. This money was known as ‘Pai-lu-p’i-pi’. Other emperors who found themselves in financial difficulty issued tortoise shell money. Prominent among them was Wang Mang  9 B.C. - A.D. 22.

The first money that can be considered to be ‘paper’ money is about A.D. 650. Our only reference to this and indeed to most of the early Chinese paper money is the book Ch’ien Pu T’ung Chih, written about 1834. It took sixteen years to compile and describes 259 Chinese notes. The author provides sketches of denominations from 1 to 10 Kwan. Modern researchers are not satisfied with the evidence for these very early notes and credit the first ‘paper’ money to Emperor Hien Tsung (A.D. 806-821). Even this, however, was not intended for general circulation. It was called ‘Flying money’ and orginated in Szechwan.

A Chinese historian, A.M. Davis, wrote in his book Ancient Chinese paper money as described in a Chinese work on numismatics,

Under the reign of Emperor Hien Tsung because (metallic) money was scarce again, the use of copper tools was prohibited. In those times travelling merchants who came to the capital brought with them the money they had received in the outlying provinces, and deposited it in the Government Treasury. Likewise did military and civil officers and wealthy families, so that they might travel undisturbed through all parts of the country. Instead of having to carry their heavy money they received certificates of indebtedness; these bore the name of ‘Fei-ch’ien’ ‘Flying money).

The system grew and became widely used by all merchants who needed to travel and spend money in the provinces. Previously they had been obliged to travel in slow caravans, weighted down by wagons full of heavy copper coin, and were often prey to marauding bandits. Flying money changed all that. Merchants simply cashed it at their destination.

Only a handful of early notes have been recovered to date and most of those are in Chinese museums. The Museum of Fine Arts, Boston, has a set of photographs of twenty notes of Chao-tsung Lung-Chi (A.D. 889-90) of the Tang Dynasty. The notes themselves could not be found.

During the Chou Dynasty (known as the Five-Dynasties) there were marked power struggles and more paper money was issued. But it is during the Sung Dynasty that our knowledge of paper money becomes more complete. The Northern Sung introduced paper money that was intended to act as evidence of transfer. Financial problems caused these notes to be unofficially used as legal tender. In A.D. 997, 1.7 million strings (tiau) of cash were outstanding and by A.D. 1017 it was around 3 million strings. A special Central Administration Office was set up for the issue of ‘Convenience Money’ and soon private shops sprang up dealing in money of convenience, issuing salt, land, and tea certificates. In one province in particular, Szechwan, paper money became popular and private banks thrived. Szechwan had previously used heavy iron coins which were cumbersome. Their notes were known as ‘giau-dze’.

There is no doubt that China made a determined effort to control its note issues, for as early as 1023 a special bureau, Yih Chu hiao Tzu Wu, was formed to supervise the issue of Chiao Tzu paper money being issued by private banks, and which were later taken over by the government. In those days paper money did not circulate indefinitely and had a life of three years. It was then expected to be worn and could be exchanged for new paper money at a small charge by the government. It was a good form of tax!

Ming Dynasty of China 1 Kwan dated AD 1368, made of dark grey mulberry bark and picturing 10 strings of cash which equalled a kwan. Large-sized notes, they measure 9 inches by 13 inches. (Courtesy of Spink) 

Chinese emperors tried to give their paper money the aura of invincibility. They contended it was much more desirable than coin which was heavy. To make sure that paper money was circulated, they required a certain portion of government taxes to be paid in notes.

When the Mongols, under Kublai Khan, swept over China they saw the advantages of paper money and followed the Sung Dynasty practice. For the first twenty years it worked well, as they backed the notes system with silver. However, as their empire expanded, they found themselves unable to pay the soldiers and resorted to the printing press. By 1358 their paper money was virtually worthless.

It is not likely that new collectors will come across any of these early notes. But the notes of the Ming Dynasty, especially those issued at the start of the dynasty in A.D. 1368 when a large quantity was made, do turn up and sometimes can be bought for as little as £3,000. They survived in some quantity owing to the practice of the Chinese of putting bundles of them inside statues of Buddha, rather in the manner of western society putting coins under foundation stones (most of the famous 1933 pennies were put under foundation stones!).

These notes were not generally known in the West until the Boxer Rebellion in 1900 when Allied troops looted Peking and upturned statues of Buddha. They found Ming notes inside. A returning American officer put one in auction in 1900 and it fetched $3,600. Considering the value of such an amount at that time, it was a very high price.  As more and more turned up the price dropped.  It is a salutary lesson to collectors that items do not always go up in value just because they are old.

Collectors have an interesting account of the Mongol notes, which preceded the Ming notes, from Marco Polo during his time in China when he writes, “it may certainly be affirmed that the grand Khan has a more extensive command of treasure than any other sovereign in the universe”. He said they simply turned paper into gold and described the production of these giant-sized notes from the skin below the bark of the Mulberry tree. The Ming notes were, apart from the inscriptions, the same as the earlier Mongol notes, and were also prepared from the mulberry tree. The notes measured 32.5cm x 22.5cm and were coloured dark slate. The inscriptions read “Government of Ming Empire” and “Government Note of the Ming Empire circulating under the Heavens for ever and ever”. The borders were attractively designed with arabesque style flowers and dragons. In the centre is a pictorial representation of coins equal to the value of the note.

European writers from the thirteenth century to the fifteenth century give accounts of Chinese paper money (William de Rubruquis, Roger Bacon, Hayton, Pegollotti and Josafat Barara). Two Arabic writers have also given important accounts: Ibn Batuta (1348) and Ahmed Shibab Eddi (1338).

Inflation destroyed the value of the Ming notes and in 1436 the government took the unusual step of prohibiting the use of notes, and returned to the use of cash coins, which of course had an intrinsic value. It seems that for the following 200 years banknotes were not used in China, but during the Ta Ching Dynasty the government got into financial difficulties and in 1651 resorted to issuing paper money again. This issue, the ‘Kuan Chao’, is much rarer than Ming notes, probably because the people did not trust paper money, recalling the days of the great inflation, and it was therefore not used very much.

The next issue of paper money, which is readily available to collectors, did not come until the T’ai Ping Rebellion in 1854-9. The Imperial Government issued Hsien Feng notes when the rebels successfully prevented government access to the copper mines and stopped cash coins being made in sufficient quantities.

If paper money goes back in history farther than most people realise, the history of banking goes back much farther and is worth studying as it was the development of banking which set the scene for the issue of paper money. Records exist of loans by the Babylonian temples in 2000 BC, and at least on private firm, the Igibi Bank, was known to be making loans and receiving deposits circa 575 BC.

We know too that Roman law recognised payments into a bank for the discharge of debts and in the second century AD notaries were appointed to register these transactions.

While we have vague information about the early Chinese hide notes there is considerable evidence for the use of leather as money in very early times. The ancient Greek historian Nicolaus of Damascus tells us of leather bearing the seal of the state appearing in ancient Sparta as a form of money (890 BC). The Trojan Svetonia records the use of circular leather pieces of money. An international authority on paper money, Dr. E. Gribanov of Russia, documents the use of furs among the early Russians and Slavs. He points out that early names for metal coins originate from the earlier names of furs used as money, e.g. kuna (marten), belka (squirrel), shkura (hide), mordka (snout), ushki (little ears) and golovka (head).

Further examples can also be found. The German Emperor Friedrich II issued leather money to his soldiers during the Siege of Faenza in 1241 and ordered his portrait to be inlaid on the leather with silver threads. Similarly, the Doge Michieli paid leather money to his soldiers at the Siege of Tyre in 1112 that bore the arms of his family and a promise to pay on the return of the fleet to Venice.

Even in modern times leather money was used in Germany. A form of leather ‘notgeld’ known as ‘Heel and Toe’ money, in the shape and size of shoe leather, is now very rare in the collecting world because, as inflation swept through the country, these leather ‘notes’ became valuable as actual shoe-repair leather and worth very much more than the monetary face value. Consequently few survived.

Paper money and its substitutes were invariably introduced because of emergencies, usually war; this is one of the reasons it is so popular as a collecting subject with its historical importance.

It is fairly certain that no paper money as such was used in Europe until the twelfth century. Until then the art of paper making was a secret owned by the Chinese. It has been suggested that the Chinese learned the skill from the Arabs, but most authorities consider it more likely that released prisoners of war of Arab nationality took home this knowledge from China. At any rate the first known paper mill outside of China was that at Herault  in 1189.

The Italian cities, Bruges, Antwerp and important towns of the Hanseatic League became banking centres in Europe and used paper for transactions, but not in the sense of banknotes. Bills of Exchange became a well-used form of money and banks became so powerful that kings found it useful to borrow from them. The earliest known promise to pay of this type is dated 1199 and bears the signature of King John. It was made out to the merchants of Piacenza and was the repayment of a debt of 2,125 silver mark lent by the merchants to Richard the Lionheart during the Holy Land crusades. By the fourteenth century the Lombards virtually controlled European banking and were so powerful in England that the street they operated from in London is still named Lombard Street.

The first proper banknotes in Europe were issued by Sweden. They were introduced in 1661 - some thirty-three years before the creation of Bank of England notes - and came about because of a reduction in the weight of copper coinage which created a shortage. The idea came from Johan Palmstruch, a high-ranking civil servant who had actually suggested a paper currency as early as 1652 in the form of small bank letters (‘banckbrieflein’).

Sweden issued the first European banknotes in 1661 but very few are known to have survived. Most of those that do are dated 1666 and are hand-signed by various officials including Palmstruch, who founded the Swedish Stockholm Bank and had first suggested, without success, using paper money as early as 1652. This note if for 50 Daler Silvermynt, dated 1666. (Courtesy of Spink)

These first banknotes of Europe were ‘credit notes’ (‘kreditivsedlar’) issued by the Stockholm Bank. They were issued in denominations of 5 to 1,000 Copper Dalers. Palmstruch signed all the notes himself, which gives them a high value among autograph collectors. They also had the signatures of bank officials. Silver daler notes were issued later in 10, 25, 50 and 100 denominations and some of the notes bore the signatures of eleven different people.

The original idea had been to issue the notes to customers who had deposits and would therefore act as receipts but in the event the bank decided to issue them without any such security. With no backing the notes became irredeemable in 1664. The government ordered the accounts of the bank to be inspected and on finding the true position an order was issued for the immediate arrest of Palmstruch. He was put on trial, found guilty, and sentenced to death. The King of Sweden intervened to reduce the sentence to imprisonment.

Very few Palmstruch notes are known to have survived - some eleven notes issued between 1662 and 1663 have been recovered and the Swedish expert Torgny Lindgren translated one as “the Bearer of the Note of Credit has a claim upon the Stockholm Bank … for 25 dalers Copper Money attested by us the undersigned Principals and Bookkeepers of the Bank; and further authenticated by the Bank Seal intended for such purpose”.

Subsequently the Swedish Parliament took control of the bank in 1668 and renamed it the Rikets Standers Bank. It is now known as the Sveriges Riksbank (the Swedish State Bank) and is the oldest existing national bank in the world.

The Swedish Parliament prohibited further note issues until 1701. Following the government’s devaluation in 1830 there was a steady increase in trust in the note issues and in 1873, following a monetary union with Denmark,  the notes could be redeemed in gold. The gold standard was suspended during World War I and again between 1920 and 1924 and was completely rescinded in 1931.

In 1790 during the Swedish-Russian War a state department issued notes known as ‘Fahnehielm notes’ after the name of the official who signed them. They were only valid in Finland for the payment of goods required by the army.

Norway was another country with very early issues, the first being 1695, just one year after the Bank of England issued notes. They are known as ‘Mohlen notes’. Jorgen Thor Mohlen had built up an empire of businesses producing ropes, soap, oil, woollen goods, gunpowder and many other things. He was the richest man in Norway and became economic adviser to the government. However, his success depended on the safe arrival of his many ships which were trading throughout the world. The wars that plagued Europe during this period caused him significant losses and made it much easier for privateers and pirates to also capture his vessels. Mohlen approached the king and asked for permission to issue banknotes as a stop-gap until more of his trading ships could arrive from various parts of the world. This was granted, but the people had little trust in the notes and presented them for redemption as soon as they received them. Eventually, Mohlen was forced into bankruptcy and, although once the wealthiest man in Norway, he died insolvent in 1709.

His notes, which still turn up in auctions now and then, were printed on thick rag paper and bore four red seals and several signatures. The wording translated, “As His Royal Majesty the 22 June this Year 1695/his Most Gracious Decree has issued/regarding certain Notes/that shall go for Money North of the Mountains of His Royal Majesty’s Kingdom Norway/Then is this Note according to the said Decree authorised for the Value of …”.

A 25 Rixdaler note, an example of the first paper money of Norway issued in 1695 by Thor Mohlen, who obtained permission from the King following severe losses caused to his trading ship by pirates. It was intended to be a stop-gap but failed and bankrupted Mohlen.

When French troops occupied Spain they issued ‘assignats’ (money backed by land) between 1808 and 1814. A number of these have survived because a convoy of Imperial Assignats was ambushed by Catalonian patriots just prior to the withdrawal of the French.

In England, apart from the Bank of England’s notes which were first issued in 1694, there were Exchequer Bills. These were payable to the bearer and therefore capable of being circulated in the manner of banknotes. In addition, they earned interest. Issued by the Exchequer, from the second issue they were accepted in payment of taxes and other government debts, thus guaranteeing their face value, something that the Bank of England notes failed to do at various times in the eighteenth century.

They were first issued in 1696 by The Chancellor of the Exchequer Charles Montague of Halifax. He had taken up Patterson's scheme for establishing a national bank and thus may be regarded as one of the founders of the Bank of England in the ninth in 1694.

An Exchequer Bill dated 1697 issued in the reign of King William III (Prince of Orange) 'for the service of the War'. These bills could be used as banknotes and were handled by the Bank of England.

The Exchequer bills were to provide money in the extreme financial crisis of times. Early issues included £5 and £10 bills, smaller values than the bank of England's notes and therefore more useful for daily circulation. Being payable on demand, the government soon arranged that the Bank of England would provide the funds when redemption was required and the Bank of England took over the management of the Bills, carefully ensuring that the smallest values were withdrawn to lessen competition with their own notes. For this reason the Bank doubled its share capital in 1709.

After the 1720s Bills were issued annually as security for loans to the government with additional amounts for circulation as required by financial panics. They were overtaken by Treasury notes in 1877 and abolished in 1897.

Japan was not far behind China in issuing paper money. Emperor Daigo (1334) is known to have issued notes though they do not appear to have circulated widely. It was not until the time of the Tokugawa (1542-1616), the founder of the last military dynasty in Japan, that note issues became more common. There is a vast series of notes, known as 'Hansatsu', which are peculiar to Japan being in the shape of bookmarks. Indeed they were used as bookmarks by Westerners when they first came to their attention, and have ever since been termed 'bookmark notes' by collectors. Many of them remain quite inexpensive, sometimes only £6 or £7 pound each, probably because they are difficult to translate, but to those who take the trouble to study them, like the British expert Eddie Prigg, they unravel a fascinating history of the past, of shoguns and warriors of Japan. Prigg has written of the Yamada Hagaki 'money notes' used in the Genna era (1615-23) which were well trusted by the people and continued in use right up to the Meiji period when the government took over control of issues. All these early notes were wood-block printed. The Fukui Han issued 'bookmark notes' for many years and high nobles like Horikawa, a Kuge family, issued in 1617. A little unusual in the paper money world, many of the Hansatsu were backed, not by coin, but by commodities. Rice was a common form of backing as its value was understood by the populous. Prigg published a long list of the various items used to back Hansatsu (IBNS Vol.40 No.1, 2001), which included rice wine, salt used by the Niimi Han of Bitchu province, kombu (kelp) used by the Himeiji in Harima province, and sencha (green tea) used by the Zeze Han of Omi province. It will be seen that collectors prepared to do some serious research can find a treasure trove among these early and little understood notes.


Japanese Hansatsu. From left to right:
Three Momme, Kawachi Province, Kyoho 15 (1730), a merchants promissory note 'Long lasting, backed by products'.
One silver Momme Enkyo 2 (1745) 'Year of the Fox' Shibamura Han.
One Momme, Harima Province. Himeji Han. Meiji issue (1868-71) blue colour.

Australia is known to collectors for its great rarities and the high prices notes can fetch. In 2009 the first 10 Shilling note issued in 1913 (P.1Aa Red Serial M000001 catalogued at US $2 million) went under the hammer at an auction for £882,000.

(Courtesy of John Pettit)

The history of money in Australia has a fascination of it's own. The famous naturalist and founder of the British Museum, Sir Joseph Banks, recommended Botany Bay for a prison settlement but the first governor, Captain Arthur Phillip, found it unsuitable and moved to Sydney Cove, where he unfurled the Union Jack on 26 January, 1788, a date that has been celebrated ever since as Australia Day. Before transportation ended some 150,000 convicts were transported to Australia. (In those days very minor offences were enough for transportation, like stealing a sheep to feed a starving family. That example was in fact a hanging offence because a sheep was worth one shilling but juries often valued the sheep at 11 pence which saved the man's life but sent him to Australia!).

The main currency in those early days was believe it or not rum. Court records show that in one assault case the victim was awarded a gallon of rum- worth at that time about 30 shillings. Indeed, money was so scarce that even the government used barter such as putting up reward posters for information, the reward being flower. The first government issue of notes came in 1893 and was marked 'New South Wales Government' (P.S1001). A £1 note of this issue sold at a Spink auction in 1990 for $10,000 in Very Fine condition.

With a vast population of convicts to control Governor King decided that rum was not a suitable form of currency and tried to suppress it. He turned away many ships with cargoes of rum and in consequence there was a serious shortage of money that led to paper money being used, though rum still remained a prominent currency. Some enterprising convicts decided to issue their own note by obtaining letters from higher officials, cutting out the signature area and adding 'I promise to pay...' which being thought to be from well-respected people were easily accepted. Military store receipts intended to be paid by the commissary general often passed as money from hand-to-hand for many months before being presented for payment.

Australian paper money can be traced back to 1807 but the earliest notes in major Australian collections are those of Garnham Blaxcell, circa 1814  who was responsible for the printed form notes authorised by the government. He was Governor King's secretary and did so well that with two prominent merchants he agreed to build Sydney Hospital at no cost to the colony. Governor Macquarie came in for criticism over this charitable act because he later let them have a monopoly of the importation of Rum as a reward. The hospital opened in 1817 and was soon nicknamed locally as 'Rum Hospital'. The first banknote came from New South Wales in 1817.

Soon after that many traders began issuing their own notes which are all very rare today and make interesting research material. It is known that some unscrupulous issuers deliberately printed notes on poor quality paper in the hope they would disintegrate before being presented for payment! One publican was known to have put his notes in an oven to make them brittle and thus hasten their destruction. As many people would stuff notes in their boots, such notes soon became being named 'Shinplasters' by the luckless holders. It was a practice that extended to Canadian notes too.

Because the population of Australia has grown so quickly from such small beginnings, it follows that banknotes issued in the early part of the 20th century are much scarcer than those of many well populated countries. More and more Australians anxious to preserve their nation's history have become collectors.

The first Bank was that of New South Wales which issued a 10 Shilling note at Sydney in 1817. Its notes continued in circulation until 1982. (Courtesy of John Pettit)

An archive specimen note of the Bank of new South Wales for £100 dated 1890. the note is perforated 'Specimen' by Bradbury Wilkinson and the serials (001- 1000) show how many were printed.