During the Northern Song Dynasty, the social economy developed rapidly. In increasingly frequent commodity trading activities, the circulation of currency continuously expanded. During the Tianbao era of the Tang Dynasty, the government only needed to mint 300,000 strings of coins annually to meet circulation demands. By the reign of Emperor Taizong of the Song, this number had risen to 800,000, and it increased every year. By the time of Emperor Shenzong's rule, to meet the needs of commodity exchange, the government minted over six million strings of coins each year, several times more than in the early Northern Song. Yet despite this, currency shortages still frequently occurred during the circulation of goods.
Under these circumstances, the emergence of paper money was almost inevitable. In the early Northern Song Dynasty, iron coins were used for circulation in Sichuan, but because iron had such low value, simply buying a bolt of cloth required paying with about five hundred jin of iron coins. One can imagine how cumbersome such transactions were. At that time, across the entire country, the region most in need of paper money was Sichuan, and it was precisely there that paper money first appeared.
The history of paper currency in China can be traced back to the reign of Emperor Wu of the Han Dynasty. During his rule, years of continuous warfare placed a heavy burden on the state's finances. To alleviate this financial strain, Emperor Wu ordered the issuance of a "white deer skin currency," which, as its name suggests, was made from the hides of white deer. He decreed that one piece of this currency could be worth 400,000 coins. However, this white deer skin currency did not circulate in the market like true paper money; its use was limited strictly to the nobility, so it can only be considered a prototype of paper currency.
By the middle of the Tang Dynasty, trade between different regions was steadily increasing. When merchants traveled to other areas for business, they often had to carry large amounts of coins, which was not only highly inconvenient but also posed security risks. In response, "flying money" emerged as a solution. Using "flying money" was simple: a merchant would first go to the government to obtain a certificate, specifying the amount of coins and the destination they planned to visit. This certificate was the "flying money." Upon arriving at their destination, merchants could present the "flying money" to the local government and withdraw the coins they needed for transactions. However, "flying money" did not enter circulation and lacked the functions of true currency; in essence, it was merely a form of remittance service. It was not until the Northern Song Dynasty, with the introduction of "official jiaozi," that paper money officially came into existence.
During the Northern Song Dynasty, while the rulers unified the country, they did not unify its currency. At that time, in most regions of the country, only iron coins could be used; in a few regions, only copper coins could be used; and in very few regions, both copper and iron coins were allowed. Local authorities strictly prohibited the circulation of local coins to other areas, and the emergence of paper money greatly facilitated the enforcement of this ban.
Paper money appeared in the Northern Song Dynasty because years of war depleted the treasury. To cover fiscal deficits, the government had to issue paper currency.
However, at the beginning, the emergence of "jiaozi" (a form of paper currency) relied entirely on those merchants, with no government involvement. The inventor of "jiaozi" was Zhang Yong, the prefect of Chengdu during the Northern Song Dynasty. As merchants used "jiaozi," they found it very convenient and spontaneously promoted its use.
At the beginning of the Northern Song Dynasty, "Jiaozi shops" had already appeared in Chengdu, Sichuan. Merchants could deposit coins in these shops in exchange for a certificate. When they later needed to withdraw money, they used this certificate as proof, but as the depositor, merchants had to pay a storage fee of thirty percent. This type of "Jiaozi" clearly could not be considered true paper money; it was more appropriate to call it a deposit book. During the reign of Emperor Renzong of Song, the government officially issued "official Jiaozi" for the first time, which became the world's earliest paper currency. It was not until six or seven hundred years later that similar paper money appeared in Europe and the Americas. The "official Jiaozi" during Emperor Renzong's reign had only two denominations: five guan and ten guan. Subsequently, the denominations of "official Jiaozi" underwent constant changes.
In the early days of issuing the "official jiaozi," the Northern Song government was quite cautious, strictly controlling the amount of paper money printed to avoid inflation, while also enacting a series of laws and policies to regulate its circulation. Under these conditions, the "official jiaozi" circulated smoothly at first. However, in the late Northern Song period, corrupt and incompetent rulers recklessly overissued the "official jiaozi" to plunder the people's wealth, causing the total amount in circulation to swell nearly twenty-fold and rapidly depreciating its value. This example remains highly instructive even in modern times: paper money itself has no intrinsic value—its worth is merely imposed by the government. To prevent currency devaluation, inflation, and to ensure economic development and social stability, a government must strictly follow financial rules when issuing paper money.