From Iron Coins to Paper Money: A Currency Revolution

Why Merchants Wanted an Alternative to Coins

Money needs to move easily if trade is to flourish. In Sichuan, China, bulky iron coins made that difficult: paying for goods could require transporting substantial loads of metal. Paper offered a way to transfer purchasing power without carrying the equivalent weight in coins.

The breakthrough was not simply a new material. It depended on people accepting a document as a reliable claim to value.

From Flying Money to Jiaozi

During the Tang Dynasty, Chinese merchants used a system known as Feiqian, or “flying money.” Traders could deposit funds in one place and collect them elsewhere, reducing the need to carry coins along dangerous roads. These transfer documents were predecessors to banknotes rather than ordinary circulating cash.

A more direct form of paper currency developed in Chengdu, in Sichuan, around the transition from the 10th to the 11th century, during the Song Dynasty. Known as Jiaozi, these notes grew out of merchants’ financial arrangements and are widely regarded as the world’s first true paper money.

The Currency That Amazed Marco Polo

When the Venetian traveller Marco Polo visited China in the 13th century, he encountered paper currency under Kublai Khan, ruler of the Yuan Dynasty. His account described a monetary system in which the ruler’s authority made paper acceptable as payment.

The notes he described were made using the inner bark of mulberry trees. This provided fibres suitable for producing durable paper. For European readers accustomed to metal coinage, the idea that bark-derived sheets could function as money was remarkable.

Protecting Paper Against Forgery

Paper money created an obvious challenge: if a note represented value, criminals had an incentive to copy it. Chinese issuers used several defences:

• Detailed woodblock-printed designs made imitation more difficult.
• Coloured inks and official seals helped distinguish authorised notes.
• Warnings on some notes threatened counterfeiters with execution and offered rewards to informants.

Centuries later, Benjamin Franklin addressed the same problem while printing colonial currency for Pennsylvania. He incorporated impressions of real leaves, using their intricate vein patterns as an obstacle to counterfeiters.

Europe Adopts Banknotes

In 1661, Sweden’s Stockholms Banco, also known as the Palmstruch Bank, issued Europe’s first banknotes. China’s experience with paper currency had begun roughly six centuries earlier.

When Too Much Money Undermines Trust

Paper currency made payments easier, but printing more notes did not automatically create more wealth. Excessive issuance contributed to serious inflation under the Yuan and Ming dynasties, weakening confidence in paper money.

As these systems deteriorated, silver became increasingly important in Chinese commerce. The lasting lesson was that a banknote’s usefulness depends not just on its design or official status, but on confidence that it will retain purchasing power.

Key facts

• China’s Tang-era “flying money,” or Feiqian, enabled transfers without transporting coins.
• Jiaozi emerged in Sichuan around the transition from the 10th to the 11th century.
• Marco Polo described paper currency under Kublai Khan in the 13th century.
• Sweden’s Stockholms Banco issued Europe’s first banknotes in 1661.
• Benjamin Franklin used prints of real leaves to help protect colonial notes against counterfeiting.