Experiments with Paper Money

  • François R. VeldeEmail author
Living reference work entry


Experiments in paper money provide the crucial link in the transition from commodity money systems to modern fiduciary currency. China’s experience ended shortly before Europe began its own experiments. Using paper instead of precious metal was a way to economize on resources but also allowed governments to finance their deficits. The experiments surveyed show how issuance of paper by a central bank, coexisting with coins made of precious metal, came to be the dominant model in the nineteenth century.


Paper money Fiduciary currency Inflation 


In the early sixteenth century, an Italian jurist named Girolamo Butigella contributed to a centuries-old debate about what could constitute valid tender in repayment of debts. At the time jurists only thought of money as taking the form of coined gold or silver, although reports of China’s paper currency (brought by Marco Polo) were taken increasingly seriously. Butigella departed sharply from the consensus. For him, monetary objects derived their value not from their intrinsic content, gold or silver, but from public approval: “even if a coin were made of lead, indeed even of wood or leather, as long as it is publicly approved, it would be possible to repay it for another coin.”

This revolutionary idea was a step too far for the eminent French jurist Charles Dumoulin, who ridiculed the notion a few years later as “irrational and ridiculous: why, by the same token, it would be possible to make money out of printed paper, and that is just as ludicrous and ridiculous as a children’s game, and not only contradicts the origin and definition of money, but also experience and common sense.”

Three centuries of experience later, paper money was anything but a children’s game. By 1800 most European countries had had direct experience with paper money of various forms, which this chapter surveys.

But first a matter of definition. Paper money is at the intersection of two concepts of money, as a monetary object and as a security. Generally speaking, money often (though not necessarily) takes the form as physical media of exchange, which can be broadly classified into those that have intrinsic value (commodity money) and those that don’t. The distinction is not clear-cut: coins made of precious metal (say, silver) usually contain some base alloy (say, copper) and as the proportion varies the coin, if it circulates, may owe less and less of its value to its metallic content. In the extreme case of pure copper, coins usually circulated for far more than their intrinsic worth and were in effect tokens. Paper money is in some respect just another form of token coinage, and indeed one of the earliest examples of “paper money” were the token coins made of recycled books in the besieged city of Leyden in 1574.

Paper money is also related to securities or more broadly liabilities. Indeed the formal similarity of the physical notes to checks (including their horizontal rectangular format) belies their common origin in medieval payment orders. Paper money is the physical evidence of a promise that used to be quite explicitly stated on the paper itself (and still is, charmingly but pointlessly, on Bank of England notes).

This chapter will use as definition of paper money a promise or liability physically represented by a piece of paper that circulates as medium of exchange. Of course this definition does not delineate sharp boundaries between what was and wasn’t paper money. On the medium of exchange aspect, it can be difficult to establish clearly how “generally accepted” a paper money was. One useful indicator is the size of the smallest denomination, compared to average income or wages. In eighteenth-century Britain, the £5 note represented a month or two of wages, too large for ordinary retail transactions but less than a pure wholesale payment instrument or a tool reserved for the merchant class. On the security aspect, there are many potential characteristics, and while paper money is now of a fairly standard form, there has been considerable variation. Some of the key characteristics are the terms, if any, under which the paper money was convertible into an intrinsically valuable object (typically gold or silver coin or bullion) and the terms under which the paper money could serve to discharge debts (i.e., was legal tender) or had to be accepted in transactions (“cours forcé”).

This chapter will proceed to survey various experiments country by country. China is first and somewhat special, as there is little direct link between its experiment, which ended in the fifteenth century, and the others which began in the seventeenth century in Europe and led eventually to the late nineteenth-century gold standard with paper issued by central banks (Van Dillen 1964).


The use of paper money began under the Northern Song dynasty (960–1126), arising at first in the Sichuan province where bronze currency, used elsewhere, was unavailable and replaced with iron (Von Glahn 2005). The inconvenience of this medium led to the emergence of privately issued paper money, soon restricted to a government-appointed monopoly, and later taken over by the local government itself in 1024. These notes, called jiaozi, were in use for decades in Sichuan but sank to 10% of their value by 1107 due to overissue and were eventually replaced by an inconvertible currency called qianyin, which was demonetized in the early 1110s. After the Jurchen people conquered the north of China (establishing the Jin dynasty) the Song retreated south. Lack of currency prompted once again private issues of paper money called huizi, in 1135. Fiscal pressure led the Southern Song government to issue its own huizi from 1160. For several decades, the value of the currency remained stable, sustained by occasional redemption into silver, but from 1190 inflation became chronic, due to both civil wars within the Song domains and constant warfare with the Jin dynasty to the north. By 1207 the principle of convertibility had been abandoned; by 1240 the money supply had increased by a factor of 50 relative to 1190. Parallel developments took place in northern China under the Jin dynasty: lacking copper mines and also fighting against the Mongols to the North, the Jin resorted to paper money (called jiaochao) from the 1150s, at first intermittently convertible into silver and later inconvertible and heavily depreciated. Ultimately both dynasties succumbed to the Mongol invasion, and the Mongol ruler Kublai Khan founded the next dynasty, the Yuan, in 1271.

In Xanadu did Kublai Khan a paper currency decree: the Yuan adopted paper money from the Jin and organized it into the sole currency to the exclusion of other forms of coinage, introducing it into their new territories as their empire expanded. They issued the currency in a large range of denominations and established redemption offices throughout the Empire. Although denominated in bronze coins, the notes were in fact convertible into silver bullion. Large notes were subject to a fee upon redemption, presumably justified by their convenience in long-distance trade. Marco Polo happened to visit the Khan just about at that time, and he was duly impressed by the brand-new and well-designed system. But it did not take long for things to go wrong due to excessive issue: within a decade convertibility was abandoned. In 1287 the currency was devalued by 80% and a new one introduced, which did not fare much better. A third currency introduced in 1307 collapsed within a few years and was withdrawn. From 1311 the two previous paper currencies circulated concurrently at stable exchange rates to silver until popular revolts in the late 1340s led to further massive issues and deep depreciation.

With such a record, one might have expected the Chinese to abandon paper money. On the contrary, the newly established Ming dynasty once again faced difficulties in supplying enough bronze coins and turned to paper money from 1375, as a supplement to coins. For a while it produced alternately metallic coins and paper money, but reckless spending eventually led to more printing, depreciation, and final abandonment in the mid-1430s. Henceforth the Chinese authorities stopped providing currency, either paper or metallic, and silver bullion became the unit of account and medium of exchange, a state of affairs that lasted until the late nineteenth century.


Sweden’s experiment started in the mid-seventeenth century (Wettenberg 2009). The early success of Amsterdam’s Wisselbank (founded in 1609) had been spurring various projects to establish a bank in Sweden since the 1620s. The first to be realized was due to a merchant from Riga (then a Swedish city) of Dutch origin, Hans Witmacker, known as Johan Palmstruch after his ennoblement. In 1656 Palmstruch received a royal charter to set up a loan and exchange bank, the Stockholms Banco, in order to fulfill two goals: stimulate trade by making loans and provide a stable medium of payment by exchanging book-entry credits for coins. Although Amsterdam only presented a model for the latter function, Hamburg’s Wechselbank (founded in 1619) also had a lending activity.

Palmstruch’s enterprise was run by him and largely controlled by the executive, i.e., the king. It first started as a deposit bank but soon began lending as well as paying interest on deposits to fund itself. In 1661 Palmstruch found a new way to fund lending, namely, issuing bank notes in standard denominations, payable on demand to the bearer. The idea came to him from the receipts that the mining company in Stora Kopparberg issued to miners in exchange for copper ore and which were seen to circulate hand to hand. The notes had an enormous element of convenience because Sweden, since the 1620s, had sought to support its copper industry by making copper into a medium of exchange. Given that the metal was roughly 100 times cheaper than silver, Sweden’s full-bodied coinage was extremely cumbersome, with some “coins” weighing 20 kg. From the start the notes were issued in a wide range of denominations, and the lowest was equivalent to around 35 g of silver, the equivalent of a large silver coin and worth 1 or 2 weeks’ wages for a laborer. Palmstruch’s bank, however, failed quickly because of overissue: it suspended payments in 1663 and was later liquidated. In its place the Estates (Parliament) created their own bank in 1668, which is now Sweden’s central bank, the Sveriges Riksbank.

Sweden underwent two more episodes of paper currency, both much more extensive than Palmstruch’s experiment. The Bank of the Parliament was directly involved in the first one, despite its charter’s prohibition on note issue. The inconveniences of the continued copper standard, continually altered to finance the wars of King Charles XII, meant that the bank’s customers took the habit of using payment orders (effectively certified checks) as hand-to-hand currency. Eventually the Bank issued “transfer notes” which were made legal tender for taxes in 1726, further enhancing their popularity. Note issue was restrained at first, but after the death of Charles XII, Parliament regained control during the “Age of Liberty” (1719–1772) and used its bank to satisfy its constituencies’ demands for cheap loans and to finance its aggressive foreign policy. By 1745 the volume of notes had reached such proportions that the Bank was forced to suspend convertibility. Prices rose and foreign exchange fell, but many observers of the time attributed this to balance of payments issues. Ultimately, after a change in the balance of power in Parliament, the government embarked on a policy of monetary contraction to reverse the currency’s depreciation, from 1767 to 1769. The resulting economic damage contributed to the restoration of autocratic rule under Gustav III in 1772, who restored convertibility of the currency and established a silver standard in 1777.

The second episode was driven by two wars with Russia (1788–1790 and 1808–1809). In the first, Parliament refused to let the Bank finance the war but was sidestepped by the establishment of a National Debt Office which soon began to issue its own paper, which circulated alongside and soon depreciated relative to the Bank’s own notes. A plan to make the Debt Office notes legal tender on the same footing as the Bank’s notes led a disgruntled rentier to shoot Gustav III during a masked ball in 1792. A few years later, a plan was drawn to stabilize the value of the Debt Office notes and turn over their management to the Bank, and Sweden enjoyed a few years of stability but became entangled in the Napoleonic wars with disastrous consequences. The Bank was compelled to assist in war finance, the money supply doubled, and the Bank’s notes became inconvertible. After military defeat Parliament regained permanent control and forced the king to abdicate in 1809, but it took many years to return to a metallic standard. In 1834, all notes became convertible in terms of silver at a fixed rate, starting a period of monetary stability that would continue until the twentieth century.


England (or more precisely, London) developed an early practice with representative media of exchange in the seventeenth century (Clapham 1945). During the Commonwealth large numbers of merchants remedied the lack of small change by issuing copper tokens redeemable on demand. After the Restoration in 1660, London goldsmiths received deposits of cash and helped their clients manage them. This entailed both the use of early checks (i.e., orders by the customer to the goldsmith to pay a third party) and the issue of promissory notes (promise by the goldsmith to pay a named party or the bearer on demand) which circulated and were accepted by other goldsmiths. Thus by the time of the Bank of England’s foundation, merchants and wealthy clients in London were used to a paper-based medium of exchange.

The Bank of England was founded in 1694 mainly to float a government loan. In a process of securitization that would be repeated with the East India Company and the South Sea Company, investors were offered equity in a commercial venture instead of a claim on government. The money raised was lent to the government, and this debt to the Bank formed its first asset; the other was the right (later privilege) to conduct banking operations in London. This, in effect, was a way to enhance the value of the loan to the investors: collectively they received the interest on the Bank’s loan to government but also enjoyed the potential profits of the Bank’s franchise. As a bank it carried out the same business as the goldsmiths (taking and managing deposits, making payments, issuing notes payable on demand) and private bankers (making loans, discounting bills, dealing in foreign exchange). This implied that, in contrast with the existing public banks of Amsterdam and Hamburg, the Bank of England would operate with a fractional reserve: only part of its assets were in the form of coins, liquid but yielding nothing.

The Bank’s beginnings were inauspicious. England was at the time engaged in an expensive war that stretched the financial resources of the government which soon turned to the Bank for help. Plans to create other banks circulated, and at least one, the Land Bank, was implemented and threatened the profitability of its business plan. Within a few months, the poor state of the silver coinage determined Parliament to recoin the whole money supply, but the process, hastily conceived and chaotically executed, left the country with too little currency; a flow of notes brought in for redemption forced the Bank to suspend convertibility on May 1696, less than 2 years after its founding. The Bank’s bonds sank to a 20% discount in early 1697. In addition the Exchequer started issuing its own bills, as small as £5 and bearing 4.5% interest, a direct competition to the Bank’s own notes. But the war was nearly over: peace was signed in September 1697. The same year the Bank was able to negotiate an extension of its charter and a monopoly on incorporated banking in exchange for swapping old government debt for Bank stock. Later, in 1707, the Bank was able to take over the circulation of the Exchequer bills by setting up a fund to ensure their convertibility on demand, restrict their denomination to £25 and above, and prevent further issues without its consent. It also obtained a further extension of its charter and a prohibition on note issue by partnerships of more than six people, all in exchange for a loan to the government. By that point the Bank had firmly entrenched its monopoly and made itself indispensable to government finances.

Note issue was not cited explicitly in the Bank’s charter, which was in fact rather vague on what kind of business it could carry out, save for a prohibition on buying and selling goods. It quickly adopted the methods of the goldsmiths, allowing depositors to transfer funds or make payments with “drawing notes” (the equivalent of checks) but also issuing “running cash notes” payable on demand to the bearer. These notes bore interest in the first years only. Fairly quickly they were issued in standard denominations up to £1000. The smallest note (aside from a few £5 notes in the early years) was £20 until 1751, £10 until 1793, and £5 until 1797 (in 1777 an Act had prohibited the issue of notes under £5). These were large denominations at a time when a laborer’s monthly wages were between £1 and 2.

The Bank came close to complete disaster in 1720, at the same time as, and because of, Law’s experiment in France. Nine years earlier, in 1711, the South Sea Company had been created to securitize existing government debt: in this instance the inducement for bondholders to convert was the expected profit from trading with the Spanish colonies in South America, including along the Pacific Ocean (then known as the South Sea). The South Sea Company, close to the Tories, was a potential rival to the Whigs of the Bank of England. This rivalry broke out openly in late 1719, when the South Sea Company, following the model of John Law’s debt conversion in France, offered to convert the whole British national debt (including the Bank of England’s annuity) into its own stock. The government would reap a lower debt burden; the investors would enjoy whatever profits the Company could expect, not only from the trade to the South Sea (which by then held little promise) but also from the management of all government debt and the eventual replacement of the Bank of England as privileged partner of the government. The threat was grave enough to lead the Bank in a bidding war with the South Sea Company; fortunately for the Bank, the South Sea Company won in February 1720, although the Bank’s annuity was left out of the conversion. The ensuing speculative fever induced government creditors in great numbers to accept overvalued stock for the debt they held. When the stock price fell, it was too late for the creditors to back out, and the Bank of England, solicited for help, demurred. Parliament refused to rescind the conversion but eventually remitted the price that the South Sea Company had promised to pay, lessening the hardship for its shareholders. South Sea shares just became government debt under another name, and the last major threat to the Bank’s dominance disappeared.

For the rest of the eighteenth century, the Bank’s history was uneventful, compared to its first years and to most of the other experiments described in this chapter. The occasional crises it encountered were at first political (such as the run in 1745 due to the Jacobite invasion) and later financial (such as the Europe-wide crisis of 1763 and the postwar slump of 1783).

As with its peers throughout Europe, the Bank’s big test came with the French and Napoleonic Wars. When France went off the metallic standard (see below), gold flowed into England; when the assignat experiment ended in 1795–1796, flows reversed, and in February 1797 the Bank was obliged to suspend convertibility for 6 months. Six months turned into 24 years, as the government found it convenient to use the Bank for short-term funding as long as the wars continued, which they did, with only a short interruption from 1801 to 1803, until Napoleon’s defeat at Waterloo in 1815. The Bank started issuing small denominations (£1) almost immediately. From 1797 to 1815, note issue tripled. Also adding to the note supply were the country banks, located outside the perimeter of the Bank’s note-issue privilege. Prices eventually rose, as did the premium on gold, reaching nearly 40% in 1813. Great Britain’s debt was also vastly expanding at the same time, and the government debt held by the Bank was never more than a few percent of the total; but, if the Bank did not massively finance deficits, it helped the government with short-term debt. Nevertheless the Bank’s responsibility in the depreciation was debated in Parliament before the Bullion Committee: the Bank’s representatives thought that the adverse trade balance was to blame, while others such as Thornton and Ricardo traced the depreciation to the issue of inconvertible notes (which, moreover, became effectively legal tender at par in 1811).

The end of the wars in 1815 brought a reduction in public spending but also a repeal of taxes, and it took longer than expected for the Bank to be in a position to resume payments, in part also because the government wished to reform the monetary system and formally put in place a gold standard before resuming convertibility. Resumption occurred in May 1821, small denomination notes were withdrawn, and the United Kingdom remained on the gold standard with paper convertible on demand until 1914.

Outside of England but within the British dominions, it should be noted that paper money came of use early in Scotland, where the Bank of Scotland issued notes from 1695 and notes as small as £1 from 1704, followed from 1727 by the Royal Bank of Scotland. In the British colonies of North America note issue by colonial governments began in 1695 in Massachusetts, although French Canada had begun issuing emergency money on playing cards in 1685 and continued to use various forms of paper money until the British conquest in 1760. All 13 colonies followed suit, with considerable variation in the management of the currencies. Typically they were not convertible on demand but were legal tender (sometimes at some future date) in payment of taxes. During the American Revolution, the Continental Congress also resorted to paper money to finance the war against Britain. This is covered in more detail in another chapter (Money and Prices in Colonial America).


The first and brief experiment with paper money started in 1701. The French government was at the time repeatedly taxing the money stock by demonetizing existing coins if they were not surrendered to the mint and overstruck with a new design. The coins with a new design had higher face value, but part of that gain was paid to the mint (in other words, the mint returned fewer overstruck coins than it received). This method had been used in 1689 and in 1693, during wartime. During the 1701 operation, the mint delivered receipts to coin holders instead of returning overstruck coins. The billets de monnaie or mint bills were preprinted and the actual sum handwritten. The bills were withdrawn by 1703, but another restriking of the coinage began in 1704, and new bills were issued, this time in large quantities and rarely in exchange for actual coins but as paper money. They were issued in standard sizes ranging from 200 L (around £12) to 1000 L, in principle payable within a month, but reimbursement was repeatedly postponed and an interest of 7.5% allowed. In 1706 they were made legal tender for up to a quarter of all payments, and the quantity issued had reached 180 million L (ten times the bank of England’s note circulation at the time). The discount on the bills reached 60% in 1710; they were eventually withdrawn by conversion into other forms of debt and by accepting them in payment of the seigniorage tax on yet another recoinage in 1709.

The failure of the billets de monnaie informed the beginning of the second experiment (Murphy 1997). When the Scots projector John Law arrived in Paris and proposed a plan to create a bank, the authorities were ultimately reluctant to let him implement his initial project, which called for a state-run bank handling all tax-related financial flows. A bank would be useful but had to be distinct from the state whose credit was ruined and could not be a substitute for the harsh measures that were required to straighten the government’s accounts. The government allowed Law to create a private bank (May 1716), whose initial capital, like the South Sea Company, consisted in heavily discounted government bills, while a combination of spending cuts, tax increases, and selective default on war contractors brought the budget roughly into balance. Law’s bank resembled the Bank of England in form, but it was not grounded in the local financial community nor did it enjoy the same broad political support. Law’s power derived largely from the support of the duke of Orléans, regent of the kingdom, and from those seduced by his theories or enriched by his operations. The Banque générale that he founded prospered in spite of the financiers’ opposition. The notes it issued were denominated in silver coins of specific weight and fineness and thus partially protected from the monetary manipulations that had plagued the kingdom since 1689. The government also acted to enhance their attractiveness. They were made legal tender for taxes and redeemable on demand by all tax collectors, which made them useful for remittances within the kingdom. And when a recoinage took place in 1718, the notes were made redeemable into new coinage at a preferential rate. The Banque also proved adept at providing deposit services and dealing in foreign exchange and was credited with lowering short-term interest rates in Paris. Law seemed to achieve in a couple years what it the Bank of England had in a couple decades.

Law, however, soon deviated from the existing English model. In December 1718 the bank was nationalized and became the Banque Royale. It issued new notes denominated in units of account, the livre, rather than in specie, which soon became legal tender for private debts. Most importantly Law, who remained director of the bank, ceased to be accountable to shareholders. Concurrently Law had created in 1717 a trading company, again on the English model, except that its main trading asset, the colony of Louisiana, was more substantial than a right to trade with a hostile country, the English South Sea Company’s only asset. In addition Law’s company quickly expanded by a series of mergers and acquisitions to become known as the Compagnie des Indes and encompass the tobacco monopoly, the slave trade, the fur trade with Canada, and all trade with the Far East. It then acquired the right to collect nearly all taxes in France as well as the lease on the royal mints. It finally offered in August 1719 to refinance the national debt, raising the funds to do so by issuing stock – in effect converting government bonds into the stock of a company that monopolized foreign trade and collected all taxes. For the conversion operation to succeed, however, the share price had to stay high, and Law propped it up by offering to buy shares with bank notes. In doing so, he lost control over the money supply even as he was demonetizing gold and silver coins and issuing notes as low as 10 livres. Foreign exchange rates began to fall and prices to rise. In May 1720 Law tried to stop the depreciation by cutting the face value of the notes in half, but this only succeeded in provoking a bank run. Convertibility, even into small silver coins, was suspended, and the notes began to depreciate. Within 6 months Law’s attempts at rescuing his construction had failed, the notes were demonetized, the Compagnie was in effect bankrupt, and Law had fled France. Eventually the notes were converted into long-term government debt, at varying rates.

Law’s experiment, the first full-scale implementation of a fiduciary currency in Europe, stands out in many respects, by the scale it reached as well as by the swiftness of its demise. Contrary to many other episodes, however, it was not brought down by fiscal pressures, but rather by its creator’s mistakes. It did not stand alone but was closely linked to a scheme whereby public debt was to become equity in a state-like entity, thereby freeing currency from the need to absorb fiscal shocks. Law also stands out because, as an economic thinker of some acumen, he conceived of paper currency as a superior medium of exchange, and therefore his experiment was intentional (and, from our point of view, forward-looking).

The third French experiment began in 1776. France had a new king, Louis XVI, a reform-minded economist as minister of finance, Turgot, a balanced budget and a temporary respite from warfare. Isaac Panchaud, a cosmopolitan figure (born in London of a Swiss father and Dutch mother) obtained permission to create a bank which he called Caisse d’Escompte. Initially intended to finance overseas trade, it quickly became a bankers’ bank. It could only issue demandable liabilities and engage in bullion trade, lending, and discounting, like the Bank of England. But its core capital was not made of government debt: it was financed with private capital, and, aside from its charter (which conferred neither privilege nor monopoly), it had initially little or no relation with the government. This could not last very long, however: French involvement in the War of American Independence had created large deficits which the government could only fill with increasingly expensive loans. Repeatedly it requested loans from the bank which was its only resource by 1788. Lacking the political authority to raise taxes sufficiently, the government was forced to call a meeting of the Estates General, the event that marked the beginning of the French Revolution. The new constituent assembly found a sufficient financial resource in the nationalization of church lands and decided to issue its own currency backed by the lands, the assignat, in 1790. This freed the Caisse from its entanglement with the government and allowed it to resume payment on its notes.

The constituent assembly thought that a free and democratic government could be trusted to manage a paper currency and had no need of a central bank. The assignat were issued in large denominations of 200 L (£8) or more, like the Caisse d’Escompte’s notes, and were briefly initially interest-bearing. Their purpose was to repay the government debt: holders of the new notes could use them to buy church lands as they were auctioned off. The first 2 years of the new currency were fairly successful. But the Revolution took a turn for the worse. The confiscation of church lands and the ensuing establishment of the Catholic clergy created strong frictions. Disagreements grew between the king, who had never really accepted the constitutional limits placed on his power, and more radical groups. When France went to war with Austria in April 1792, the budget situation quickly went out of hand. The conflict became Europe-wide the following year, and money creation became the only resource left for the revolutionary government. Notes were issued in smaller denominations, down to 5 L (£0.2) in 1791 and 0.5 L in 1792. The regime of the Terror successfully forced people to use the currency and limited the extent of depreciation of the currency. Once the Terror was ended in August 1794, the currency’s value began to slide rapidly, and by March 1796 it was less than 1% of its original value. A short-lived replacement, the mandat, collapsed within a few months.

The Caisse d’Escompte had not survived the Revolution: it had been shut down by the revolutionary government in August 1793. But in 1796 it was essentially reconstituted, under the name of Caisse des comptes courants. It formed the nucleus around which a group of major bankers formed the Banque de France in February 1800, with the support of Napoleon Bonaparte’s new regime. But in contrast with the other belligerents of the Napoleonic Wars, France’s bank did not finance government spending, and its notes remained convertible throughout, indeed all the way to 1914 except for a few brief episodes (1848, 1870 to 1873).


Denmark (whose king also ruled Norway until 1814) also has a long history with paper money (Andersen 2016). In 1695 a merchant named Jørgen Thormøhlen obtained a royal charter to issue bank notes in Norway, but he went quickly bankrupt. When Denmark participated in the Great Northern War against Sweden, the king issued notes, ranging from 1/6 to 100 riksdaler, that were legal tender but only for half of the payment (1713–1716). The notes went to some discount relative to silver coin but were eventually all retired at par by 1728. Not long after a private bank was chartered in Copenhagen, the Kurantbanken. Its notes were legal tender for taxes only. The bank operated as a classic bank, taking deposits, discounting bills, and making loans, including initially modest loans to government. Its notes were convertible on demand, but the bank was not subject to reserve requirements, and it seems to have kept low reserves, exposing it to runs. Convertibility was suspended temporarily from 1745 to 1747 because of silver outflows from Denmark and again in 1757 when the Seven Years War broke out. This suspension, however, would last for several generations. The government made the notes legal tender for all payments, issued denominations as low as 1 riksdaler (£0.2), and borrowed extensively from the bank. Peacetime efforts to restore convertibility never succeeded: the government nationalized the bank in 1773 and learned to live with, and manage, a large stock of inconvertible paper money.

The system that emerged in the Danish dominions was unusual and complex. Although the stock of Courant notes tripled during the last third of the eighteenth century, the extent of their depreciation remained limited. In 1791 the Danish-Norwegian specie bank was established to manage a dual monetary system: it issued its own notes convertible in silver on demand but also redeemed the Courant notes at market price. The Danish king was also ruler of Schleswig and Holstein (the duchies), but these kept a separate monetary regime; in particular the Danish Courant notes were never legal tender. In 1776 a bank was created in Altona, in Holstein near the great commercial center of Hamburg. This bank held deposits and made transfers but did not issue notes; a successor state-owned bank created in 1788 continued to support foreign trade and also issued notes, but its strict rules on note issue and convertibility were always abided.

By the late 1790s, Denmark, although neutral in the wars that were ravaging Europe, could not escape their impact. In 1799 silver outflows led to the effective demise of convertibility and renewed issues of paper money through a Depositokasse. In 1801 Admiral Nelson destroyed the Danish fleet, and in 1807 Copenhagen was bombed and largely destroyed by the British fleet. The Danish government was forced to resort to more paper money issues, increasing the nominal stock by a factor of nearly 6 to 1813, by which time the currency had lost over 90% of its value. In 1813 a new bank, the Riksbank, was created and its notes replaced the Courant notes at a 6:1 ratio. The new institution’s main asset was a lien on all real estate in Denmark. It nevertheless took nearly 30 years to resume convertibility of the notes: this occurred in 1845 in Denmark (Norway, which had been transferred to Sweden in 1814, resumed convertibility in 1842).


Austria’s first public bank, the Wiener Stadtbanco, was created on the model of the Venetian Banco del Giro to turn exiting government debt into a ledger-based payment instrument (Jobst and Kernbauer 2016). Initially put under the authority of the municipality of Vienna, with dedicated tax revenues as assets, it progressively lost its autonomy and, under Empress Maria Theresia, became largely controlled by the government. In 1762 it was ordered to issue notes (Bancozettel) from 5 florins (about £1.7) to 100 florins, which were not legal tender between private parties but were accepted for up to half of tax payments. The notes were convertible on demand into silver or could be used to buy government bonds. The issue, made in the last stages of the Seven Years War, was designed as temporary, but the notes were well received, and the issue was renewed in 1771, this time legal tender for half of all payments. Use of the notes spread further into the Austrian domains in the 1780s.

As elsewhere the French and Napoleonic wars created large fiscal burdens which were partly financed by note issue. In 1796 the notes were made legal tender in every payment, and convertibility was restricted, and then suspended, in 1797. The increasing depreciation of the paper currency led to the melting of the silver coinage and the issue of notes down to 1 florin (and up to 1000 florins). As Austria was engaged in nearly constant warfare against France (and constantly losing), paper issues exploded. The first attempt at stabilization and reform occurred after the Treaty of Schönbrunn, which deprived Austria of 17% of its territory. In 1811 the volume of notes had surpassed 1 billion florins (20 times the volume in 1796), and, after some debate, the government had to default on its debt (reducing interest payments by half) and on the currency, converting it into new notes at a 5:1 ratio. The new currency, eventually called the Vienna standard, devalued in subsequent years as war, and paper issues, resumed in 1813, tripling the volume of the new currency in 3 years.

In Austria as elsewhere in Europe, the peace of 1815 was a turning point. In 1816 the “Privileged Austrian National Bank” was founded as a privately owned joint-stock company with a 25-year charter. The plan was to have this institution, modeled on the Bank of England, circulate its redeemable notes in parallel with the old currency which would be progressively retired. The first attempt at conversion offered holders of Vienna standard paper florins the option to convert into a mixture of silver coinage and low-yielding government bonds, but the option was too attractive and withdrawn within a few weeks. In 1819 a second, more successful plan left to the Bank the conversion policy; the Bank exchanged notes for silver at a pace of its choosing and returned the notes to the government for silver and 4% bonds. The value of Vienna standard florins stabilized quickly at the Bank’s parity of 2.5:1, and the old currency was progressively retired, while the Bank’s notes remained redeemable.

By the 1840s Austria might have seemed in as good a position as Denmark or Sweden, but a full return to a metallic standard was repeatedly postponed. In 1848 the wave of revolutions that swept over Europe brought revolts in the Empire’s Italian dominions and secession in Hungary: a run on the Bank’s soon forced a suspension of convertibility, and the government borrowed from the Bank and issued its own paper. After the emergency the quantities of paper money were stabilized, and resumption of convertibility was planned for 1859 but was postponed by the war against Piedmont and France that year. Resumption was projected for 1866, but another war, this time against Prussia and Italy, broke out that very year. The compromise between Austria and Hungary the following year created two parliaments but left a single central bank for the two halves of the monarchy, which meant that the process for deciding monetary policy was cumbersome. By 1873 the Bank came close to resuming convertibility, but the collapse of bimetallism and the fall in silver prices made it undesirable to resume on the old silver standard. Instead the Bank started targeting a stable gold value for its notes. Ultimately, the Austro-Hungarian Empire never quite returned to convertibility at a fixed parity. Instead, from 1892 the central bank actively managed the exchange rate to maintain parity with other gold-standard European currencies.


Until the seventeenth century, Russia’s monetary system was limited to small silver coins called kopeks, alongside imported foreign coinage (Bloch 1899). In 1655, during the First Northern War, Tsar Alexis minted silver rubles (until then the ruble was a unit of account of 100 kopeks) and then similarly sized copper rubles intended to circulate for the same value. From 1658 overissue resulted in rapid depreciation of the copper rubles, which in 1663 traded at 50 to 1 for silver rubles. This episode of war finance with overvalued currency was repeated many times in Russian history until the 1920s.

Peter the Great in the early eighteenth century designed a European-style monetary system with gold, silver, and copper coinage for different denominations, but Russia did not yet extract gold or silver, and acquiring enough through foreign trade was a slow process. This, as well as continuous warfare, led to repeated debasements of the silver currency as well as large issues of overvalued copper under Peter I and his immediate successors. With the accession of Catherine the Great in 1762, the use of debasement and copper issues ended, but the circulating currency was still dominated by large quantities of copper whose inconvenience, as in Sweden, predisposed the public to accept a paper alternative (Heller 1983). Thus, when Catherine instituted banks in St Petersburg and Moscow in 1768 to issue paper assignats redeemable in silver or copper, the response was initially favorable. For the next 20 years, the assignats, issued in denominations from 25 (£5) to 100 rubles, suffered little or no depreciation and served as a medium of exchange.

In 1786 Catherine the Great merged the two banks into one Imperial Assignat Bank and created a bank to lend against real estate to the nobility and urban classes. At the same time, she raised the circulation from around 40 million rubles to a maximum of 100 million and issued smaller denominations (5 and 10 rubles). Over the next few years, Russia was at war with Sweden, Poland, and Turkey, and the self-imposed limit was soon breached. The assignats began to depreciate. After 1794 Russia fought in Poland, Persia, and the Caucasus, and the assignat circulation reached 210 million in 1799. A brief attempt at making it convertible at a 1.3:1 ratio in 1798 failed. Russia’s involvement in the European wars against France, as well as incessant fighting on its southern borders with Persia and Turkey and in the Caucasus meant constant deficits; lack of central control over the bureaucracies and inefficient tax collection compounded the problems.

The peace of Tilsit in 1807 with France opened a brief window for reform. The value of the assignat kept falling, to half and by 1810 to a quarter of its face value. A bold plan, put forward by the Tsar’s adviser Mikhail Speransky, reform posited that the silver ruble was the true monetary standard, renounced the use of money creation, and froze the circulation of assignats at its current value. Of course Speransky understood that this was only possible as part of a comprehensive reform of finances that would balance budgets on a permanent basis. To stabilize the value of the assignats, he planned to redeem a fraction, raising the necessary funds through sales of state lands. He also planned to found a silver-based note-issuing bank on the model of the Banque de France, partly owned by the state and partly by the private sector and engaging in short-term discounting of commercial paper rather than the long-term land-backed mortgages that the existing state bank offered. Although some steps were taken according to these plans, continuing deficits in preparation for war and the abrupt dismissal of Speransky in March 1812 prevented further progress. In April 1812 the assignat was made legal tender and unit of account for all payments. Russia would continue to use fiat currency for decades.

After Napoleon’s disastrous invasion of Russia and the end of the European wars in 1815 finally brought a respite for Russian finances. From 1817 the quantity of assignats was kept constant or decreasing and their value stabilized. The same year the Bank of Commerce was founded, which eventually formed the nucleus for the central bank. Finally, under Minister Kankrin a reform enacted from 1839 to 1843 replaced the assignats, at a 3.5:1 ratio (the current market value) with credit notes issued by the Bank of Commerce and convertible on demand in silver, backed by a reserve of at least 1/6 of their total amount.

Deficits continued however, and when the Crimean War broke out in 1853, there was no choice but to suspend convertibility in 1857. In 1860 the state bank was founded: although under the government’s complete control, it was endowed with a metallic reserve to back the credit ruble, and in 1861 a crawling peg was instituted to bring the credit ruble progressively back to par, but the Polish insurrection of 1863 put an end to this experiment. The war against Turkey in 1877 brought further increases in the circulation of credit rubles, which reached its peak in 1879.

By now the rest of the world had moved to the gold standard, and silver’s value on the world market was falling. As in Austria, the credit ruble reached par and even gained relatively to the silver ruble. The government accumulated gold reserves through capital inflows as well as exploitation of mines in Siberia and in 1897 made the credit notes convertible into gold, putting an end to a century of fiduciary currency.


Why was paper money invented? The answer is straightforward: relative to metallic money, which preceded it for nearly two millennia, paper money is more convenient to use and cheaper to produce. However, this answer immediately raises another question: why did it take so long to invent? This survey of experiments with paper money suggests that, while it is a good idea, paper money is difficult to execute.

Paper money’s advantage, its low cost of production relative to its potential value in exchange, is also its weakness, leaving it exposed to the twin threats of counterfeiting and overissue. Counterfeiting is not specific to paper, and it has plagued metallic coinage since its inception; but it is more dangerous for paper money or token money in general, that is, money whose cost of production is substantially below its market value. To the extent that the intrinsic content of a gold or silver coin is ascertainable, the problem of counterfeiting is limited; coins that are made of gold but not struck by the official authority entail little or no loss to their owners, nor do they diminish the value of authentic coins. Not so for paper money.

The problem of overissue is specific to paper money. There cannot be too much gold or silver coinage, because if there were users would melt the excess coins and put the metal to other uses. This safety mechanism is unavailable for paper money: the paper is worthless in alternative uses, and some alternative mechanism is needed to ensure its value.

Paper money appeared so late in the history of money because these challenges entailed a number of technological and institutional prerequisites. Paper was necessary, and (for large-scale, standardized, and hard to counterfeit issues) a printing technology. China had both long before the West and a centralized state that could enforce use and deter counterfeiting.

Paper and printing gave the West books and printed images in time for the Renaissance and the Reformation, but weak and fragmented states meant paper money came later, through a variety of paths. One is the concept of emergency money: a temporary, overvalued currency issued by an authority to serve as a medium of exchange under extraordinary circumstances, with an implicit or explicit promise to retire it at face value after the emergency has passed. The most common documented examples, stretching from the late fifteenth to the early nineteenth centuries, are obsidional currencies, issued during a siege by the local commander to pay his troops, and made of roughly cut metal plate of tin, copper, or sometimes silver.

Still the first experiments (Sweden, England, and France) arose through private entities (banks), albeit state-chartered. This is not surprising. The forerunner of paper money as a circulating claim is the bill of exchange, and to this day the format recalls that origin (as does the antiquated “promise to pay the bearer on demand” on the Bank of England’s note). The attempts at economizing on precious metals (or, in Sweden, cumbersome copper) took the form of promises, claims issued by banking institutions. Aside from the well-known London goldsmiths, mention should be made of the Neapolitan banks, a group of nonprofit depository institutions that arose in the late sixteenth century and early on issued circulating liabilities called fede di credito. Although they did not take the form of a standardized bank note until the nineteenth century, they point to the source of the innovation in early modern banking practices.

But even if paper money can be said to have arisen from the private sector, government was not far and soon became closely involved. By the mid-eighteenth century, Sweden and Denmark had implemented state-run, economy-wide paper money, soon followed by Austria and Russia. As it turned out, launching a currency was easy: managing it properly was another matter. Long before the Bullion controversy in Britain, interesting debates were taking place in Sweden and Denmark over the determinants of the value of money and the proper management of a fiduciary currency. From the eighteenth-century experiments, two competing models of paper money emerged, one issued by private banks in large denominations and geared toward wholesale payments and the other issued by the state and effectively replacing coins in retail payments.

The European wars from 1792 to 1815 represented a watershed. Both models were tested, and few countries that had paper money were able to maintain convertibility. But the degree of depreciation varied considerably. It was mild in England and was reversed after convertibility resumed at par. In Austria and Russia, the loss of value, while limited in comparison to twentieth-century inflations, surpassed 90% (as it had a few years earlier during the American Revolution). Of the two models, that of the Bank of England (and the Banque de France) clearly triumphed. In the classical gold standard adopted in Britain in 1816, the unit of value was tied to a constant amount of gold, represented by large-value coins. Smaller denominations were issued in silver or bronze, as tokens rather than full-valued coinage. Notes circulated alongside coins, convertible on demand. As with medieval emergency monies, deviations were understood to occur: a fiscal emergency could lead to temporary suspension of paper’s convertibility, and the suspension could be quite long; but resumption at par was expected to follow, as it had in Britain in 1821, as it did in the United States in 1879 after the issue of “greenbacks” during the Civil War. Accordingly, in August 1914 nearly all belligerents suspended convertibility of their paper money, unwittingly opening a quite different chapter of monetary history.



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© Springer Nature Singapore Pte Ltd. 2018

Authors and Affiliations

  1. 1.Federal Reserve Bank of ChicagoChicagoUSA

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