Jiaozi 交子 or jiaochao 交鈔, literally "exchange certificates", are said to have been the oldest paper currency used in China (and also of the world), but it was in the beginning rather a system of bills of exchange. Early precedents of paper currency were deer-skin bills (bailupi bi 白鹿皮幣) used during the Former Han period 前漢 (206 BCE-8 CE), and the "flying money" (feiqian 飛錢) and "easy exchange" (bianhuan 便換) used during the Tang period 唐 (618-907). These bills of exchange were traded in private exchange booths (jufang 柜坊 or jifupu 寄附鋪), and in official exchange houses (bianqianwu 便錢務). In addition to that, textile fabric was also common as a means of payment, as it was part of the tax system.
Jiaozi were invented in the 10th century in Sichuan by a private merchant company. In contrast to the heavy iron coins (tieqian 鐵錢) used as the common currency in Sichuan, paper was much lighter, and was issuable with high denominations, like 1,000 qian 錢 (1,000 coins), an amount weighing no less than 25 kilos when in the shape of coins. Having to transport great sums over large distances, the merchants invented bills of exchange (chuquan 楮券, chubi 楮幣) for payment purposes. The paper was imprinted on both sides in red and black, in an imitation of the receipts (shouju 收據) used by the merchants, with a serial number, the name of the issuing company, marked with a chop (seal), and with decorative patterns.
The denomination was handwritten, and there was thus no limit to the value of the bill. The design of the notes was not uniform in the first years, but was then standardized by the 16 largest merchant houses of Sichuan, and they decided to found a paper note bank (jiaozi hu 交子戶 or jiaozi bu 交子鋪) issuing a common set of bill forms (explicitly bearing the word jiaozi 交子). These private paper notes (si jiaozi 私交子) were acknowledged by the local government as an official means of payment. It is known that the conversion of the bills into coins required an exchange fee (liqian 利錢) of 30 wen 文 (see standard cash) per 1,000 coins, i.e. 3 per cent. Several cases of bankruptcy endangered the system. This is why the central government of the Song dynasty 宋 (960-1279) decided to take over the management of the system.
In 1023 a Paper-Notes Office was founded (jiaozi wu 交子務, later called qianyin wu 錢引務), following the proposal of the prefect (zhizhou 知州) of Yizhou 益州 (Chengdu), Xue Tian 薛田. A year after its foundation, the office issued the first series of notes, with a fix denomination of 1 min 緡 (i.e. 1,000 cash), one guan 貫 "string" (700 wen), and up to 10 guan, yet in practice it was possible to discount or revalue the note. In 1039 the denominations were limited to 5 and 10 guan, with a ratio of 20 per cent and 80 percent, respectively, of all issued notes. In 1068 the denomination was lowered to 1 guan and 500 wen, the latter constituting 40 per cent of the issued notes.
The management of the Paper-Notes Office was under the supervision of the controller-general (tongpan 同判) of Yizhou who had a small staff with a manager (zhangdian 掌典), accountants (tieshu 貼書), printers (yinjiang 印匠), carvers (diaojiang 雕匠), casters (zhujiang 鑄匠) and labourers (zayi 雜役). All notes were freely exchangeable into coins, yet because of their high denominations, their use was limited to wholesale activities. The exchange fee was called zhimofei 紙墨費 "fee to [cover expenses for] paper and ink". Other target currencies were gold, silver, and dudie 度牒 certificates (originally a tax exemption certificate for Buddhist monks and nuns). The paper notes themselves were printed in three-colour style and are thus also beautiful examples of the early printing technique in China, and of the advanced techniques in Sichuan in particular. The government decided to limit the life cycle (jie 界 or 屆) of the notes to two years (from 1199 on, three), and they were replaced with fresh notes after that period of time.
The amount of notes circulating was officially restricted to 1,256,340 min, covered by just 360,000 min of coins in specie (benqian 本錢). The great usefulness of the notes inspired merchants of other regions to introduce paper notes, too, mainly those of Shaanxi and Hedong (south of today's Shanxi), and even troops were handed out their military pay (junxiang 軍餉) in paper notes. In the Liang-Huai 兩淮 region (modern Anhui and northern Jiangsu) the notes were called huaijiao 淮交 (introduced in 1136 but abolished quite soon). Yet the wider the system spread, the lower the exchange value of the note was. The increase in 1098 of the notes circulating even aggravated the inflation because the administration of Emperor Zhezong 宋哲宗 (r. 1085-1100) did not keep an eye on the limitation of the notes. At that time, jiaozi were appreciated at just a quarter of their nominal value. Emperor Huizong 宋徽宗 (r. 1100-1125) therefore decided in 1105 to replace the jiaozi notes by a new paper currency called qianyin 錢引.
A few years later the inflation was so bad that a bill nominated 1 min was traded at but a dozen coins. It was believed that the galloping inflation was the result of a missing financial backing by coins, but attempts at raising the stock of held backing coins failed because the number and types of paper notes had expanded by use for the payment of taxes (diben 糴本, see pingdi 平糴) and military pay. While just 700,000 iron coins (700 min) were available in specie, the markets had swallowed 3.78 million min of paper bills, later even 4.14 million. In 1204 a further amount of 5.3 million min of new bills were issued, which had a market value of just 400 or even 100 coins per min. The government in Sichuan thereupon decided to dispose its silver and gold, and to sell brevet titles of state offices or certificates for tax exemption. In 1256 finally a "currency reform" was carried out, and the jiaozi replaced by huizi 會子 paper notes.
Another problem of the Southern Song 南宋 (1127-1279) economy was the drain of copper cash towards the north, which was controlled by the Jin empire 金 (1115-1234) of the Jurchens. The Song administration therefore introduced iron coins in the border region of Liang-Huai, as well as paper bills. In this way, it was possible to block the northward flow of Song copper cash to a certain extent.
The economically prosperous region along River Huai had earlier used another type of paper money, known as huizi. The introduction of the new money caused enormous trouble in the markets of the region. The Song court therefore abolished both iron coins and jiaozi paper bills, yet jiaozi continued to circulate after 1166, with the denominations 200 wen, 300 wen, 500 wen and 1 guan, with a total amount of about 3 million guan. In 1192 Emperor Guangzong 宋光宗 (r. 1189-1194) fixed the exchange rate at 770 wen of iron coins per guan, yet this measure was not able to prevent inflation.
Paper notes contributed without doubt to the economic boom under the Song dynasty and the early monetization of the Chinese economy.