The Chinese were the first to invent paper around 100 AD. They were also the first to invent paper money, which in its early form can be traced back to the 7th century.

In the year 812, the Chinese Emperor used it as a temporary solution because of the copper shortage. This money was called "flying money". It was so popular that by the year 970 it dominated as a monetary unit.

These first bank notes carried a guarantee that it could be traded at any time for coinage. The name of this bank note was "cash".

The oldest existing bank note is the 1000 cash note of the Ming dynasty from the era of the Great War 1368-1398. It is 225 x 340 mm with a pile of coins centrally depicted . The picture was to show people who couldn't read that they could trade the bill in for the depicted number of coins.

When Marco Polo came back from his travels in China (1275-1292), people in Europe didn't believe that the Chinese used paper for money. Paper money in Europe came 300 years later. The use of paper money in China stopped in 1455.

The history of paper money in Europe is interesting. It started as emergency money substituting for regular money. The first emergency paper bills are from 1483. The first bank notes were printed in the 17th century.

The first European banknotes were printed in Sweden.

In 1644 copper plate money was minted, but besides being very heavy it was quickly devalued because of the 30 Years War (1618-1648).

Therefore, Johan Palmstruch, who in 1657 founded the Stockholms Banco, suggested as a new monetary unit - a temporary "Kreditivsedlar" (credit paper). He printed the first banknotes in 1661.

Unfortunately for Johan Palmstruch, all this came to a bitter end. The bank very quickly got into trouble for printing too many bank notes. Palmstruch was taken to court and was made accountable for damages and was sentenced to prison. Not many Stockholms Banco-Notes remain today and are a rare collectors item.

A battle had raged for decades between the King and the merchants, for control over England's money system. The arrival of William III of Orange in 1688 with his "glorious revolution" heavily financed by merchants tipped the scales in favour for the often spoken wish for an independant credit institute.

Following the suggestion by William Patterson, the Bank of England was founded in 1694. The Bank of England printed "Goldsmithnotes" as promissory notes from English gold smiths for account deposits. The clause "(I) promise to pay the bearer on demand the sum of (...) pounds" (i.e. in gold) originally meant that they could be exchanged for gold, although in practice this was not always possible.

The state received a loan in exchange for the right to print banknotes. In time the Bank of England developed into the most influential bank of issue bank in the world.

One year after the founding of the Bank of England, the Bank of Scotland was initiated. It held the bank note monopoly for Scotland until 1717. Also in Norway, which at the time was a Danish province, in1695 the businessman Thør Møhlen, circulated banknotes (without interest) with the approval of the government. The notes had 5 wax seals. Unfortunately the population didn't find them acceptable and brought them immediately to the bank to cash them in. As a result, Thør Møhlen came into financial difficulty.

It wasn't until 1713 that Denmark began circulating paper money during the war with Northern Ireland. It was also served as a form of emergency coinage and emergency money.

France also began printing paper money in the year 1703 under Louis XIV. Because of uncertainties connected with paper money, other states waited until the late 19th century.

One problem with paper money was the paper itself. Several companies experimented with the processing of special paper in the 18th and 19th century.

Information (History of P. M.) from http://www.moneymuseum.com.

For our present purpose we include in this description all paper substitutes for metallic currency whether issued by banks, governments or other financial institutes.

Early bank-notes were simply printed forms in which the amounts were written by hand. They were usually for large amounts (40 and upwards) and were printed upon water-marked paper; and, although no precautions were taken in the engraving to prevent fraudulent imitation, forgeries were comparatively rare. But, when at the end of the 18th century small notes for 1 and £2 were put in circulation, forgery became rife, as many as 352 persons being convicted of this crime in England in a single year; and from that time to the present a constant trial of skill has been going on between the makers of bank-notes and the counterfeiters. Engine-turned ornaments and emblematical figures or views introduced in the engraving, in conjunction with special water-marks in the paper, held the forgers somewhat in check until the discovery of photography put into the hands of the counterfeiter a most dangerous weapon, by the aid of which complicated patterns and vignettes could be perfectly reproduced. To prevent such reproduction Henry Bradbury in 1856 introduced anti-photographic bank-note printing, in which the essential portions of the note were printed in one colour and over this another protective colour was placed. A photograph of a note printed in this way presented a confused mingling of the two colours; but with the advance of photographic knowledge means were found of obtaining a photograph of either colour separate from the other, and it consequently became necessary to introduce a third colour and to secure a special photographic relation between the three colours to prevent their separation.

Photography, however, although the most dangerous weapon of the counterfeiter, is not the only means of imitation available, a fact which is sometimes overlooked. A note may be perfectly secure against photographic reproduction, but from the absence of other necessary features may be easily copied by an engraver of ordinary skill. There are two systems of engraving employed in bank-notes: - (r) line-engraving in which the lines are cut into the steel or copper plates; and (2) relief-engraving in which the lines stand up above the plate as in wood-engraving. In the former, adapted to the process called plate-printing, the ink is delivered from the lines in the plate to the paper pressed upon it; in the latter, adapted to surface-printing, the ink is spread upon the face of the lines and printed as in typography. Plate-printing gives by far the finer and sharper impression, but as there is a perceptible body of ink transferred to the paper from the cut lines, it has been supposed that an impression from plate would be more easily photographed than one from surface where only a film of ink is spread upon the top of the raised lines. But surface-printing being much less sharp and distinct than plateprinting, imperfect copies of notes for which that process is used are the more likely to escape detection. The plates upon which the early notes were engraved being of copper quickly wore out and had to be constantly replaced. The result was great difference in the appearance of the notes, those printed from new plates being sharp and clear, while others, printed from old plates, were pale and blurred. These differences were a great assistance to the forger, as the public, being accustomed to variations of appearance between different genuine notes, were less apt to remark the difference between these and counterfeits.

In the early part of the 19th century, Jacob Perkins (1766-1849) introduced into England from America what is known as the transfer-process, in which the original engraving on steel is hardened and an impression taken from it on a soft steel cylinder, which in its turn is hardened and pressed into a soft printingplate. By this means as many absolutely identical plates can be produced as may be required, and being hardened they will yield a very large number of prints without any appreciable deterioration. Another method of securing uniformity is the multiplication of plates by electro-deposition, the surface of the copper-electrotype plates being protected by the deposit of a film of steel which effectually prevents the wearing of the copper and can be renewed at will.

The water-mark of the paper, on which formerly reliance was placed almost exclusively, puts a difficulty in the way of the counterfeiter, but experience has shown that in ordinary circumstances it does not in itself afford adequate protection. The means by which it can be imitated are well known, and, since a distinct water-mark is incompatible with strong paper, the life of a water-marked note is much shorter than that of one printed upon plain paper. The best bank-note paper is made from pure linen rags and was formerly made by hand. Machine-made paper is however now largely used, as it possesses all the strength of hand-made and is much more uniform in thickness and texture.

In documents which pass current as money it is obviously the duty of the bank or government issuing them to take all reasonable means to prevent the public from being defrauded by the substitution of counterfeits; and a bank whose circulation depends upon the confidence of the public must do so in its own interests to insure the acceptance of its notes. This principle is now recognized by all issuing institutions, but in practice there is room for improvement in the issues of many important establishments, partly because of the disinclination of the directors of a bank to change the form of an issue to which the public is accustomed, partly because of the difficulty of deciding what is really a secure note, and in certain cases because, owing to exceptional circumstances, an issue may be practically immune from forgery although the notes themselves present little or no difficulty in imitation. The features essential to the security of an issue are (I) absolute identity in appearance of all notes of the issue; (2) adequate protection by properly-selected colours against photographic reproduction; and (3) high-class engraving comprising geometric lathe work and well-executed vignettes. In addition it is important that the design of the note should be striking and pleasing to the eye, and the inscription legible.

The notes of the Bank of England are printed in the bank from surface-plates in black without colour or special protection except the water-mark in the paper. They are never reissued after being once returned to the bank, and their average life is very short, about six weeks, so that a dirty or worn Bank of England note is practically never seen. This arrangement, coupled with the difficulty of negotiating forged notes in England, the lowest denomination being f5, accounts for the comparative immunity from forgery of the bank's issues.