How and Why did paper money start?

People had some mutual requirements and started to exchange commodities. Two people exchange some quantities of wheat and rice as they wish to eat both. If they decide that the demand for rice is double that of wheat, they will come to an agreement that for every two Kgs of wheat, one Kg of rice will be given. This is what is called Barter System

Later, people had difficulty with the Barter System, because Barter system gets complicated with increasing number of entities. Some of the problems are that not all commodities can be physically carried and then exchanged, and if a person wants oil he has to look for a person who has oil and needs wheat. Now, these problems complicated the matters for people to exchange (trade). As we say necessity is the mother of invention, people started to identify certain valuable items which are equally demanding across for most people and which are very portable. People started to accept certain types of mineral rocks, fish bones, sea shells, and whale tooth. Now, slowly this led to gems, and jewels. and then to Gold, Silver and other metals. These metals can be melted and can be transformed into whatever you want. So, people started trading in thesemetals and that led to Gold Based System.

But metal money also has a set of disadvantages. People had problems in assessing the purity of the metal, metals wear down and lose value, coins have to periodically be reminted and returned to the original weight, heavy for large transactions, prone to robbery, and metal is limited in the nature. During this time, many temples and goldsmiths who had place to store gold, started a business to store people’s gold. People stored gold in exchange of a claim check. If one deposits a one-ounce gold, one gets a one-ounce claim check. People started to deposit their gold here and used the claim checks as money. People found that it has the same value as the gold they’ve deposited and they can claim anytime they want. All these papers are redeemable and they have the same value. This laid the foundation for the paper currency.

Gold is still considered as ‘the real money’

Gold is an element that comes in only one form and doesn’t combine with other elements. It doesn’t tarnish or rust, and can be melted to make foils out of lumps and lumps out foils. It is extraordinarily dense and cannot be counterfeited as all other metals are not that dense.

Gold doesn’t have many uses except for some uses in electronics and dentistry. Silver, Copper, and Bronze are used in many industries. As a result, Gold is hardly consumed or changed from one form to another. Of the 125 million kilograms of Gold found till now, humans own close to 100 kilograms of Gold and very less is used for other purposes. Even till date, people perceive Gold as the real money. India is one of the largest markets for Gold and much of the demand for Gold in India is satisfied from the imports.


The Rise and Fall Cycle

From the 15th to 18th century, China and India controlled almost half of global trade. This pattern continued till India became a part of the British empire, in the 19th century and Chinese trade became increasingly controlled by those who controlled the sea routes – England, France and the US. India became independent and China turned to communism in the mid-20th century and both began to rebuild their economies. In the 21st century, China and India became the world’s fastest growing economies and the centre of gravity of global trade appeared to shifting east. A look at the growth trajectory of the Asian giants over the last 5 decades:



As Arab traders ship Indian goods to Europe through the Red Sea and Mediterranean ports, India’s economy has a 24.5% share of world income. It is the world’s second largest after China. India enjoys a favorable balance of trade – it earns gold and silver from the textiles, sugar, spices, indigo, carpets, etc it sells


Direct maritime trade between Europe and China begins with the Portugese, who lease an outpost at Macau in 1557. Other Europeans follow. India and China trade with each other using overland routes.



At the turn of the century, Mughal India’s annual income (17.5 million pounds) is more than the British budget. As the Mughal Empire reaches its zenith under Shah Jahan, Indian exports exceeds its imports – it is selling many more things and lots ore of each. Chinese ships dock at Quilon and Calicut, while in Khambat the volume of trade is so high, more than 3000 ships visit the port every year.


China continues to control a quarter of world trade. The English establish a trading post at Canton in 1637. Trade grows further after the Qing emperor relazes maritime trade restrictions in the 1680’s. By now, Taiwan has come under Qing control. But the sea trade makes the Chinese apprehensive about the conquest.



Aurangzeb’s India has a 24.4 % share of world income, the largest in the world. But as Mughal power declines, the East India Company disrupts trade relations between India’s mercantile community  and the wider world.


In 1760, as China’s share of global trade begins to fall, the govt sets out regulations for foreigners and foreign ships. Canton is the only port open to alien traders. After their War of Independence (1776), the Americans begin to trade with China. It is a setback for the British.



In the 1820, India’s economy – now controlled by the East India Company – is 16% of world income. The Company promotes the opium trade with China. The Indian agricultural pattern is changed by the Company. By 1870, India has a 12.2% share of a world income.


The Qing King refuses to open all ports to foreign traders and seeks to restrict the opium trade with India. War breaks out twice between Britain and China. A defeated China accepts the opium trade and gives Western merchants access to its most developed area. Tea exports increase 500% in eight years from 1843, totalling42, 000, 000 kg in 1855.



In 1913, India’s economy has a mere 7.6% share of world income. In 1952, seven years after Independence, it has just 3.8%. By 1973, its economy has grown to $494.8 billion, which is a piffling 3.1% share of world income. In 1991, economic liberalization is intiated by P.V. Narasimha Rao. By 1998, Indian economy accounts for a 5% share of world income. By 2005, India’s economy accounts for 6.3% of world income.


Before Communist China came into being in 1949, the country mainly produces yarn, coal, crude oil, cotton and foodgrain. Mao Zedong puts the country on a socialist path. In 1980, under Deng Xiaoping, China changes track and the first SEZ is established in Shenzhen. In 1986, Deng’s “open-door” policy encourages foreign direct investment. In 1992, Deng accelerates market reforms to establish a “social market economy”. For the first time, China figures in the world’s top10 economies. In 2001, it joins the WTO.

This is an article from Times of India.