China's path from receipt to money
Long-distance trade using thousands of copper coins was heavy and costly. Columbia University explains that merchants in the late Tang period, around 900 CE, began trading receipts from deposit shops where they had left money or goods.
In the early Song period, a small group of shops received a monopoly on such certificates, and in the 1020s government took over. These became the first known government-issued paper money. Success depended on acceptance, control of issue and usefulness within the economy.
What the paper represents
A receipt can be a claim on deposited coin or metal. If transferred in payment, the claim itself circulates as money. Redemption may later weaken or end, leaving a note that functions under an issuer's and monetary system's rules.
This separates physical paper, legal claim and unit of account. The paper costs little to make, while its denomination may be large. Value therefore rests on the system's credibility and usefulness rather than the note's material.
- a deposit receipt documents a claim on a custodian
- a redeemable note promises exchange for a stated asset
- a fiat note relies on today's monetary and legal order
European notes followed a different chronology
In Europe, coin and bullion custody, bills of exchange and banking receipts contributed to banknotes. The Bank of England describes sixteenth-century goldsmiths issuing receipts for deposited gold coin, which people gradually used for payment. Issuing banks later standardised their own notes.
Chinese and European experience are not one continuous chain of invention. A similar problem—the costly movement of metal—received different solutions under different institutions.
Benefits and new risks
Paper is lighter, divisible by denomination and suited to large payment volumes. It can also be destroyed, forged or overissued. A redeemable receipt adds the risk that a custodian lacks enough assets to honour all claims.
Bitcoin is also non-commodity information about value, but it is not a paper claim on coin in a vault. Under self-custody it is the ability to authorise an output on the network. A balance on an exchange is once again a claim on a custodian—resembling a deposit receipt.