This is the story of how Song Dynasty China invented paper currency while Western Europe was still trying to figure out how 2-dimensional perspective worked.
A first edition of Song paper currency. Image courtesy of PBS; original source unknown.
Song Dynasty China (960-1279 CE) saw the population reach 100 million people. This population tended towards urban and dense settlement patterns. Their relative proximity to one another created a situation in which farmers were able to produce primarily for the market, rather than for subsistence. They used their profits to buy products such as tea, oil and wine. This burgeoning market economy gave rise to vibrant inland and coastal shipping industries.
As trade intensified, merchants became increasingly specialized and organized. They set up partnerships and joint stock companies with shareholders. In large cities, merchants organized into guilds. With this increasingly complex economy came major technological breakthroughs. Papermaking flourished to complement the Song’s moveable type printing industry, engineers began to make use of gun powder, and the iron industry’s output grew by 600% between 800 and 1078.
Of course, all economies (at least, those which have moved beyond the barter setup), no matter how great or small, require some manner of currency. Tang China (618-907) briefly flirted with the idea of easily transportable currency in the form of bolts of silk, but quickly abandoned that system. The principle form of currency in the early Song period was copper coins—by 1085, Song China was producing 6 billion coins per year (up tenfold since the Tang period).
However, this coinage system was extremely cumbersome for those making large purchases. To alleviate the load, merchants, beginning in the Late Tang period, began to trade receipts from deposit shops where they left money or goods in lieu of exchanging copper coins. Seeing that these receipts were backed up by real currency and goods with real value, the Song authorities issued a small set of these shops a monopoly on the issuance of these certificates of deposit. In the 1120s, the government took over the system, producing the world’s first government issued paper money.
Song paper currency. Image courtesy of Wikipedia; original source unknown.
The achievements of Song China range far beyond the creation of paper currency, from the comparatively high literacy rate, to the idea that there should be some sort of level playing field when it came to the exam system, to the feats of engineering which baffle modern engineers. Song China’s achievements were such that many historians will argue that it was the most advanced society in the world in its time (although I’m sure historians of the Song Dynasty and historians of the Golden Age of Islam have fights about this).