For two millennia after the Lydians first minted coins, these small discs made from precious or semiprecious metals were the commonest forms of money in many parts of the world. But for large transactions, coins are heavy and bulky, and paper banknotes, promising to pay the bearer on demand, in the end proved much more convenient.
The first such promissory notes were produced in China in the second century BCE and were made of leather. After the Chinese invented paper, they quickly realized it was the ideal material for banknotes, and paper notes began to circulate locally in the seventh century CE , and more generally in the tenth century.
In the later Middle Ages merchants in Italy and Flanders began using personal promissory notes, and these IOUs became payable in coin to anyone who had them in their possession. It was not until the 1660s that the first European banknotes were printed. Initially notes were printed by banks or other private institutions, although later this role became the sole prerogative of national governments.
The first European government issue of paper money actually took place in the North American colonies. Because coin coming from Europe by ship could take weeks if not months to arrive, colonial governments sometimes had to resort to issuing IOUs. The first instance was in French Canada in 1685, when the governor denominated and signed playing cards so they could be used as cash.
Through the 18th century paper money helped to expand trade, especially internationally, and banks and wealthy merchants began to buy and sell foreign currencies, so creating the first currency markets. If traders believed the government of a particular country was strong and stable, its currency was likely to increase in value against other currencies. International competition led countries to try to affect the value of a rival’s currency, either by pushing up its value so its goods became too expensive to export, or by pushing it down and reducing the rival’s ability to import goods – and to pay for war.
‘All these pieces of paper are issued with as much solemnity and authority as if they were pure gold and silver . . . Kublai Khan makes them to pass current universally over all his kingdoms and provinces and territories.’
The Travels of Marco Polo (1298)