Paper money has numerous advantages over its metal counterparts; a fact that led to its origin in China way back in the 10th century. That isn't quite surprising considering that the ancient Chinese have given the world quite a few important things, including paper, printing press, and paper money itself. Basically, the history of paper money has been full of ups and downs. It originated in ancient China, then it disappeared from there, then it was introduced in Europe, and eventually it reached the United States.
Like other countries, even China used coins that were made from various metals as a form of currency. Ancient Chinese coins were circular in shape and featured a rectangular hole at their center. A string was passed through this hole and a bunch of coins was made; this made the task of carrying them around a lot easier. In course of time, the Chinese merchants realized that roaming around with this heavy bunch of coins was a tedious task.
In order to solve this problem, the Chinese introduced a new system wherein the merchants kept their coins with another person and took it in writing on a piece of paper. When the merchant wanted his coins back, he just had to show this piece of paper to the other person. As time elapsed, the use of these promissory notes became even more popular and eventually, paved way for the development of actual paper money called Jiaozi.
Other than the difficulty involved in carrying these coins, shortage of copper also played a crucial role in the development of paper money in China. The first instance of the use of Jiaozi dates back to the 10th century, when China was under the Song Dynasty regime. These paper notes were widely used in Chengdu, the capital of Sichuan province of China, between 960 - 1279 AD. They had a unique banknote seal, which was used to ensure that people don't counterfeit them.
Though Song Dynasty was the first to issue paper notes, it didn't become the major medium until Yuan Dynasty came to power in China. The paper currency issued during the reign of Yuan Dynasty founder, Kublai Khan, was referred to as Chao. The use of paper money dwindled to a great extent by the end of 14th century, and it virtually disappeared from the picture for a brief period.
United States of America
Even though the Chinese invented paper money way back in the 10th century, it was introduced as a method of exchange in the United States much later, i.e., in the 17th century. The Massachusetts Bay Colony became the first of the thirteen original colonies to issue paper currency in the United States in 1690―even before the United States was actually formed. The term 'Continental currency' came into existence in 1775, when the Continental government used it to finance the American Revolutionary War. However, there was no solid backing to this currency. It was easily counterfeited and eventually, it lost its value.
First Bank and Greenbacks
While the federal government didn't print paper currency directly, the US Congress chartered the First Bank of the United States in 1789 and gave it the authority to do so. The attempt was successful, but the bank closed down in 1811, as the federal government failed to renew its charter. The US Congress chartered the Second Bank of the United States in 1816. Despite the fact that its charter was not renewed by the federal government in 1836, this bank continued operations until 1941 under the charter issued by Commonwealth of Pennsylvania. Eventually, in 1862, the federal government started printing paper money on its own. The year also marked the introduction of the United States Notes, commonly known as the Greenbacks, which were last issued in 1871.
In 1910, the Bureau of Engraving and Printing of the Department of the Treasury took the entire process of currency production, including the task of printing, in its own hands. Interestingly, the largest note ever printed by the Bureau was the $100,000 Gold Certificate, Series 1934, which was printed back in 1934 - 35.