How Paper Money Started?

Paper money first started in China in about 7th century. Paper money was first used by traders as a mean to do business. Traders used to deposit gold or silver coins to a trusted man who would issue a
note of confidence that would state that anyone who would  receive the note is eligible to claim certain gold coins or other valuable goods from the issuer. However, the custom of issuing notes changed as people never came back to the issuer to claim the gold coins and instead kept circulating the note within traders. As the note issuer knew that he/she would never be claimed money by note holder, the issuer started to issuing paper money without any gold or silver deposit. This gave birth to the paper money.

Paper money was adopted by Europeans in 17th century. At this time, paper money was printed as banknotes by commercial banks which were required to redeem gold and silver to chief cashier of originating banks. Much later, central banks started printing national banknotes that replaces the commercial bank banknotes.

The first bank to initiate issuing banknotes was the Bank of England. Bank of England started issuing money with the promise to pay the bearer the value of the banknote on demand. It was the first step to issuance of fixed denomination notes, and by 1745 standardized money ranging from £20 to £1000 were printed.