China China has a long
history with paper money, beginning in the 7th century
CE. During the 11th century, the government established a monopoly on its issuance, and about the end of the 12th century, convertibility was suspended. The use of such money became widespread during the subsequent
Yuan and
Ming dynasties. The
Song dynasty in China was the first to issue paper money,
jiaozi, about the 10th century CE. Although the notes were valued at a certain exchange rate for gold, silver, or silk, conversion was never allowed in practice. The notes were initially to be redeemed after three years' service, to be replaced by new notes for a 3% service charge, but, as more of them were printed without notes being retired, inflation became evident. The government made several attempts to maintain the value of the paper money by demanding taxes partly in currency and making other laws, but the damage had been done, and the notes became disfavored. The succeeding
Yuan dynasty was the first dynasty of China to use paper currency as the predominant circulating medium. The founder of the Yuan dynasty,
Kublai Khan, issued paper money known as
Jiaochao during his reign. The original notes during the Yuan dynasty were restricted in area and duration as in the Song dynasty. During the 13th century,
Marco Polo described the fiat money of the
Yuan dynasty in his book
The Travels of Marco Polo: Europe According to a travelogue of a visit to Prague in 960 by
Ibrahim ibn Yaqub, small pieces of cloth were used as a means of trade, with these cloths having a set exchange rate versus silver. Around 1150, the
Knights Templar would issue notes to pilgrims. Pilgrims would deposit valuables with a local Templar preceptory before embarking for the Holy Land and receive a document indicating the value of their deposit. They would then use that document upon arrival in the Holy Land to receive funds from the treasury of equal value.
Washington Irving records an emergency use of paper money by the Spanish for a siege during the
Conquest of Granada (1482–1492). In 1661,
Johan Palmstruch issued the first regular paper money in the West, by royal charter from the Kingdom of Sweden, through a new institution, the
Bank of Stockholm. While this private paper currency was largely a failure, the Swedish parliament eventually assumed control of the issue of paper money in the country. By 1745, its paper money was inconvertible to
specie, but acceptance was mandated by the government. This fiat currency depreciated so rapidly that by 1776 it was returned to a silver standard. Fiat money also has other beginnings in 17th-century Europe, having been introduced by the Bank of Amsterdam in 1683.
New France 1685–1770 In 17th century
New France, now part of Canada, the universally accepted
medium of exchange was the
beaver pelt. As the colony expanded, coins from France came to be used widely, but there was usually a shortage of French coins. In 1685, the colonial authorities in New France found themselves seriously short of money. A military expedition against the
Iroquois had gone badly and tax revenues were down, reducing government money reserves. Typically, when short of funds, the government would simply delay paying merchants for purchases, but it was not safe to delay payment to soldiers due to the risk of
mutiny.
Jacques de Meulles, the Intendant of Finance, conceived an ingenious
ad hoc solution – the temporary issuance of paper money to pay the soldiers, in the form of
playing cards. He confiscated all the playing cards in the colony, had them cut into pieces, wrote denominations on the pieces, signed them, and issued them to the soldiers as pay in lieu of gold and silver. Because of the chronic shortages of money of all types in the colonies, these cards were accepted readily by merchants and the public and circulated freely at
face value. It was intended to be purely a temporary expedient, and it was not until years later that its role as a
medium of exchange was recognized. The first issue of playing card money occurred during June 1685 and was redeemed three months later. However, the shortages of coinage reoccurred and more issues of card money were made during subsequent years. Because of their wide acceptance as money and the general shortage of money in the colony, many of the playing cards were not redeemed but continued to circulate, acting as a useful substitute for scarce gold and silver coins from France. Eventually, the
Governor of New France acknowledged their useful role as a circulating medium of exchange. As the finances of the French government deteriorated because of European wars, it reduced its financial assistance to its colonies, so the colonial authorities in Canada relied more and more on card money. By 1757, the government had discontinued all payments in coin and payments were made in paper instead. In an application of
Gresham's Law – bad money drives out good – people
hoarded gold and silver, and used paper money instead. The costs of the
Seven Years' War resulted in
rapid inflation in New France. After the
British conquest in 1760, the paper money became almost worthless, but business did not end because gold and silver that had been hoarded came back into circulation. By the
Treaty of Paris (1763), the French government agreed to convert the outstanding card money into
debentures, but with the French government
essentially bankrupt, these bonds were defaulted and by 1771 they were worthless. The
Royal Canadian Mint still issues Playing Card Money in commemoration of its history, but now in 92.5% silver form with gold plate on the edge. It therefore has an intrinsic value which considerably exceeds its fiat value. The Bank of Canada and Canadian economists often use this early form of paper currency to illustrate the true nature of money for Canadians. Provincial governments produced notes which were fiat currency, with the promise to allow holders to pay taxes with those notes. The notes were issued to pay current obligations and could be used for taxes levied at a later time.
20th century Immediately after
World War I, governments and banks generally still promised to convert notes and coins into their nominal commodity (redemption by
specie, typically gold) on demand. However, the costs of the war and the required repairs and economic growth based on subsequent government borrowing made governments suspend redemption by specie. Some governments were wary of avoiding
sovereign default but did not realise the consequences of paying debts by consigning newly printed cash not associated with a metal standard to their creditors, which resulted in
hyperinflation: for example the
hyperinflation in the Weimar Republic. From 1944 to 1971, the
Bretton Woods agreement fixed the value of 35 United States dollars to one
troy ounce of gold. Other currencies were calibrated with the U.S. dollar at fixed rates: for example the pound sterling traded for many years within a narrow band centred on US$2.80. The U.S. promised to redeem dollars with gold transferred to other national banks. Trade imbalances were corrected by gold reserve exchanges or by loans from the
International Monetary Fund (IMF). The Bretton Woods system was ended by what became known as the
Nixon shock, a series of economic changes by United States President
Richard Nixon in 1971. These changes included unilaterally canceling the direct
convertibility of the
United States dollar to
gold. Since then, a system of national fiat monies has been used globally, with variable exchange rates between the major currencies.
Precious metal coinage During the 1960s, production of
silver coins for circulation ceased when the
face value of the coin was less than the cost of the
precious metal it contained (whereas
it had been greater historically). In the United States, the
Coinage Act of 1965 eliminated
silver from circulating dimes and quarter dollars, and most other countries did the same with their coins.
The Canadian penny, which was mostly
copper until 1996, was removed from circulation altogether during the autumn of 2012 due to the cost of production relative to face value. On February 9, 2025, United States President
Donald Trump instructed
Scott Bessent, the
secretary of the Treasury, to halt production of the penny, citing its high production costs. In 2007, the Royal Canadian Mint produced a million dollar
gold bullion coin and sold five of them. In 2015, the gold in the coins was worth more than 3.5 times the face value. ==Money creation and regulation==