Did you know that the first recorded use of paper money was in China,during the reign of the Emperor Wu-Ti,in the 2nd century BC.
The use of paper money as a circulating medium is intimately related to shortages of metal for coins. In ancient Chinacoins were circular with a rectangular hole in the middle. Several coins could be strung together on a rope. Merchants in China, if they became rich enough, found that their strings of coins were too heavy to carry around easily.
To solve this problem, coins were often left with a trustworthy person, and the merchant was given a slip of paper recording how much money he had with that person. If he showed the paper to that person he could regain his money. Eventually from this paper money "jiaozi" originated.
In 1661, the Bank of Stockholm created the first banknotes in Europe.
Until Louis XIV, banknotes were issued by small creditors, had limited circulation, and were not backed by the authority of the state.John Law helped establish banknotes as formal currency, backed by capital consisting of French government bills and government accepted notes.