Paper money began with the "flying cash" of the Tang (618-907) dynasty around 800. The Tang government considering the inconvenience of shipping cash to distant areas where government purchases were made, paid local merchants with money certifiactes called "flying cash", because of its tendency to blow away. These certificates bearing different amounts of money could be converted into hard cash on demand at the capital. Since they were transferable, they were exchanged among merchans almost like currency.
"Flying cash" was not meant to be currency and its circulation was rather limited. Real paper currency was not introduced until early in the Song (960-1279) dynasty, when it was utilitzed by a group of rich merchants and financiers in Szechuan, the same province where the art of printing had been invented. Each banknote they issued had printed on it pictures of houses, trees, and people. Red and black inks were intermittently applied; the seals of the issuing banks were affixed; and confidential marks were made on each bill. All these devices made counterfeiting extremely difficult. These banknotes could be converted into hard cash at any time in any of the issuing banks. Widely circulated, they were readily accepted for the payment in debt and other financial obligations. In 1023 these banknotes were withdrawn and only official notes printed by the government were allowed. This new adopted governmental policy was successful at first for two reaons: First, for each issue of paper notes to be put into circulation, the government provided a cash backing. Second, paper notes and standard coins were interchangable. Moreover, a citizen could buy salt or liquor with his paper notes from the government-owned stores. In short, paper notes were as good as coined money.
After Chin (1115-1234) occupied the north China, it followed Song's practice. In 1154 it established a Bureau of Paper Currency in Kaifeng as the central agency in charge of all issues. Two kinds paper currency were issued, one of large denominations, consisting of one to ten strings (each string was worth 1000 standard coins) and another of small denominations, bearing the amounts of one to seven hundred standard coins. The validity of each issue was limited to seven years. However little thought was given to backing the currency issue and inflation soared during the 12th century. Even though counterfeiter of paper currency was punishable by death, there were few attempts. In 1183, a printer, who had produced 2600 fake notes in 6 months was arrested and sentenced to death.
Soon after the Mongol took over China and established Yuan (1264-1368) dynasty, it followed the example of its predecessors, Tang, Song and Chin, in using paper currency. The first paper currency issued in Yuan dynasty was in 1260. Various denominations were printed, ranging from a face value of two standard coins to the highest denomination of two strings. Excessive printing year after year soon flooded the market with depreciated paper money until the face value of each certificate bore no relation whatsoever to its counterpart in silver. In 1272 a series of new issues was put in circulation and the old issues were converted into the new ones at the ratio of five to one. The new issues were printed with copper plates instead of wood blocks, as had been the case before. In 1309 another conversion became necessary. In fifty years from 1260 to 1309 Yuan's paper money was depreciated by 1000 percent. To make the situation worse, the government often refused to exchange for new issues old certificates that had been worn out through a long period of circulation.
Paper money went westward when the Mongols printed Chinese-style note in Iran in 1291 and led to the usual inflation. The earlist European paper money was printed in Sweden in 1601. It is possible that Europeans learned the art of printing and paper currency through the examination of Chinese paper money which were either obtained in Westeren asia during the Yuan dynasty or had been brought back from China by travelling Europeans.