Among the devices which commercial nations have developed to facilitate the processes of exchange, representative money in the form of paper has come to have a very large importance. In early times people did not use paper money for the simple reason that they did not know how to make paper, but they used other forms of representative money in much the same way as some forms of paper money are used to-day. Small pieces of leather stamped with an official seal were among the earliest forms of representative money. When the increase in trading made skins inconvenient as a medium of exchange, small pieces were cut from them and presented as evidence of possession.1 Proof of ownership could be shown if necessary by fitting these pieces into the places from which they were cut. When people got accustomed to these leather tokens they continued to use them long after the use of the actual skins as a medium of exchange had been abandoned.

A form of paper money was used in China and in other ancient civilizations at a very early time. In the thirteenth century Marco Polo found paper notes circulating in China which were legal tender and of different denominations. The introduction of paper money in Europe grew out of the difficulty and danger of carrying or storing large quantities of metal coins. In England, for example, merchants, finding it unsafe to keep money in their own houses or places of business, deposited it with goldsmiths, who had better means of safeguarding it. The goldsmiths gave receipts for these deposits of money in much the same way that warehouse receipts are used to-day. After a time the practice arose of transferring these receipts or "goldsmiths' notes," instead of withdrawing and transferring the money when payments had to be made. It was but a short step to the circulation of notes which were general promises to deliver a sum of money on demand without reference to specific deposits of coin. When people became accustomed to the use of paper promises to pay in specie, governments found it possible to issue paper which was only nominally payable in coin but which circulated as freely as the coin itself. The use of paper money on any considerable scale, however, did not begin until public banks were established.