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Chapter 5 of 12 · What is money?

Paper money: from China to the goldsmiths of London

Educational text. This content explains concepts and history; it is not an individual investment recommendation or a promise of returns. Figures, rates and regulatory status have a reference date of and change over time. The bracketed references — [1], [2]… — are listed in the Sources section.

Paper money was not born in Europe. In the Chinese province of Sichuan, merchants issued paper receipts — the jiaozi — to replace heavy iron coins; in 1024, the Song dynasty took over issuance and created the first official government banknote on record [10].

In 17th-century England, the path was different. London goldsmiths kept gold and coins for their customers and issued receipts confirming the deposit [11]. Over time:

  1. the customer deposited gold with the goldsmith-banker;
  2. the goldsmith issued a note promising to pay the bearer;
  3. the customer could instruct the goldsmith to pay someone else;
  4. the notes began to circulate as a means of payment.
The goldsmith's receipt Drawing: the gold rests in the goldsmith's vault; the note that promises to pay the bearer leaves the vault and circulates from hand to hand, paying for goods — while the gold does not move. Goldsmith's vault the gold stays deposit The note pays the bearer Whoever receives the note circulates — the gold does not move
Paper began as a certificate of deposit: it promised to pay in metal to the bearer. As the notes circulated from hand to hand, the gold sat still in the vault.

The goldsmiths also began lending out part of the funds in their keeping. The note of the Bank of England, founded in 1694, derives from these notes [11]. At its origin, paper money was a certificate of deposit — a promise of payment in metal. This distinction helps explain what came next.

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Sources

All online sources accessed on September 15, 2026.

  1. PCGS. A thousand years of folding money. https://www.pcgs.com/news/a-thousand-years-of-folding-money
  2. BANK OF ENGLAND. The Bank of England note: a short history. Quarterly Bulletin, 1969 Q2. https://www.bankofengland.co.uk/quarterly-bulletin/1969/q2/the-bank-of-england-note---a-short-history