Paper money is a country’s official paper currency that is circulated for transaction-related purposes for goods or services. The printing of paper money is typically regulated by the Government, that is, a country’s central bank/treasury in order to control the flow of cash. Paper money can be traced back to China in the 11th century by the Yuan Dynasty. Prior to paper money, the barter system or gold coins were used in exchange of goods and services
It is believed that paper money truly evolved in the early renaissance Europe. The Europeans were still making use of coins till the 16th century. Later, the banks started making use of bank notes for depositors, investors, and borrowers instead of the ‘heavy’ coins. These issued bank notes could be taken to the banks at any time and exchanged for their face value in silver and gold coins. The paper money could be used to buy goods, and it operated much like paper currency today- though it was issued by banks and private institutions, not the government.
The first paper currency which was issued by a government was actually issued by the colonial governments in North America. Shipments between Europe and the colonies took so long that the colonists often ran out of cash as operations expanded. The colonial governments used IOUs, which are documents that acknowledge a debt owed in business transactions, and these IOUs were traded as a currency. The first instance of such a transaction was in Canada, then a French colony. In the year 1685, soldiers were issued playing cards denominated and signed by the Governor to use as cash instead of coins from France.
The shift to paper money in Europe greatly increased the amount of international trade that could occur between countries and even continents. Banks and the ruling class started buying currencies from other nations, and this single event created the first currency market. The stability of a particular government or monarch affects the value of the country’s currency and the ability for that country to trade on an increasingly-international market.