The First Paper Money

[A] Paper money began as a receipt. Merchants in eleventh-century Sichuan found the iron coinage of the region impossibly heavy - a modest purchase could require several kilograms of it - and began depositing their coin with trusted houses in exchange for a written note. [B] The note circulated. Anyone holding it could present it and collect the metal, so it changed hands as though it were the metal itself. Within a generation the practice had spread across the province.

[C] What happened next is the part worth attention. The deposit houses noticed that only a fraction of the notes were ever redeemed at any one time, and that they could therefore issue rather more notes than they held coin. [D] Some managed this prudently. Others did not, and the resulting failures persuaded the provincial government to take the business over in 1023, issuing its own notes against its own reserves. That is usually recorded as the birth of state paper currency, though it might more accurately be called the first bank regulation. The instrument itself had been invented by merchants who wanted to avoid carrying iron about.