The first paper money
In the early eleventh century, merchants in Sichuan, in south-western China, faced an unusual problem. The coins in use in the region were made of iron rather than copper, and iron coins were worth so little that a large purchase required a great weight of them. Carrying enough coins to buy a bolt of silk could be a burden for a strong adult.
The solution came first from private businesses. Merchants who stored iron coins for their customers began issuing paper receipts, known as jiaozi, which could be handed over in place of the coins themselves. Because a receipt could be exchanged for coins at the merchant's office, it was accepted by other traders as if it were money.
The system was not free of problems. Some issuers printed more receipts than they had coins to cover, and when they could not pay, holders of the notes lost their savings. In the 1020s, the government responded by taking control of issuing the notes itself, opening an official office for the purpose. It is this step, rather than the merchants' receipts, that many historians regard as the beginning of government paper money.
Official notes were at first issued for a fixed period, after which they had to be exchanged for new ones. Over the following century, however, the authorities were repeatedly tempted to print notes to meet their own expenses, especially in wartime. As more notes circulated, each one bought less, and public trust in paper money was badly damaged.
The idea itself survived. Later governments in China issued their own notes, and accounts by travellers carried descriptions of paper currency to other parts of the world, where many readers dismissed them as exaggerations.