Money banknotes

The Origin of Paper Money

We all want money. The feeling of holding a bunch of it in our hands is a comforting thought. But have you ever wondered where it came from?

It is common knowledge that in the earlier days, we didn’t have the kind of money we have now. We didn’t have coins. We didn’t have notes that smell like success. We had a barter system. Exchanging valuable goods for other valuable goods. So, when was paper money issued?

Before Paper Money - Barter

The barter trade system involved uncertainties and caused a lot of unequal distribution of wealth. There was a lack of trust. How could you possibly know if the animal medicine was worth your gold? Or how can you measure how many goats can buy you the cotton yarn? You had no way of knowing this.

There were many advancements in this field of the exchange system. After using the barter system and exchanging valuable goods to buy something you needed (a fair trade), coins made an appearance. Carving coins and using them to buy goods was efficient and a standard people could follow. But soon, you couldn’t really know how to account for the abundance of it. It was a short-term solution.

The First Paper Money

The first paper money was issued by the Chinese during AD 618 and 907. This was adopted by the US in 1690. This paper currency was backed by gold and silver reserves. Later, in 1914, The US Federal Reserve Board issued a $10 note as official paper currency. However, they weren’t always regarded as money.

This paper money was issued in the form of IOUs or bills of credit. This meant that if you have a paper note of $10, the bank owed you a value of $10. If you give the note to someone else in exchange for a ball, then the bank would owe them $10. But you have the ball now.

This system has not changed since. The paper currency currently used is still classified as IOUs, but this is not commonly known. The purpose serves the same. After a while, counterfeit money started circulating in the market. In 1996, the design of notes was altered, and certain features were added to it so money could not be reproduced other than the authorized banks.

The Success of Paper Money

The discovery of paper money improved trade and business to a great extent. People had a standard and could spend freely now. From a governmental perspective, paper money was easier to control. They could reduce supply and increase supply according to the market needs, which was not possible for other systems of exchange.

Apart from domestic business activities, paper money also helped in increasing international trade. This was because the invention of paper money caused money to be more mobile. You could easily exchange it, send it to someone, or transfer it through banks.

The first discovery of paper money helped the economy to come where it is today. Globally, it is a set standard. A common unit. And it is fascinating to think how if paper money had not been issued by the US in 1960, we would still be trading cattle.


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