The first paper money

The first paper money came into being because merchants with many gold and silver coins ran a high risk. After all, they had many valuable coins in their pockets and were therefore often the target of robberies. Also when large payments had to be made, large bags of gold and silver would be transported from the payer to the recipient. The risks of a robbery during such a gold transport were high.
Merchants deposited their gold at a bank for safekeeping and in return received a paper title deed, which indicated how many grams of gold the holder was entitled to and where this gold was stored. The gold could only be collected by the holder upon presentation of the paper deed. These deeds were registered in the name of the holder, so that a robber would not benefit from them.
The role of paper money grew rapidly, because this means of payment was also usable for international transactions. Banks exchanged gold among themselves or opened branches in different cities, which facilitated the use of paper money. This means of payment became increasingly popular, because it did not have the disadvantages of large amounts of gold.

The introduction of paper money in Europe

Paper money was introduced in Europe at the end of the 16th century. Initially, paper money served as a promise of payment. The bank promised the holder of the banknote that, upon surrender, this note could be converted into coins with the same value as stated on the note.

The advantages of paper money over coins

Paper money had many advantages over coins:
Security: Paper notes reduced the risk of theft because they did not have the same appeal as precious metal coins.
Convenience: Banknotes are much lighter and therefore easier to carry than bags full of coins. This is useful for transactions involving large amounts of money.
Reliability: Banks guaranteed the value of paper money by linking the note to gold reserves, which instilled confidence in users.
 

How banks guaranteed the value of paper money

Banks guaranteed the value of paper money by ensuring that each banknote issued represented an equivalent amount of gold. In this way, banknotes are linked to the value of gold. Customers used to be able to exchange their notes for gold, which increased confidence in paper money. Banks thus played an important role in preserving the value of paper money, which was crucial for its acceptance.

The spread of paper money worldwide

With the growth of international trade and the opening of banks in different regions, the use of paper money spread from China, where it was invented, to the world. Trade between Asia and Europe facilitated this process.
Paper money quickly became a practical means of payment that was widely accepted and replaced traditional forms of trading with precious metals. Paper money laid the foundation for modern financial systems as we know them today, in which trust in the financial system plays an essential role.
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