We seldom think about why paper money has value, since everyone alive today takes it for granted that a bill in the wallet with a picture of the queen (or now king) is worth what it says.
But paper money didn't spring into being overnight, and we owe a strange series of circumstances to its creation in England during the late 17th century. It took a French king, a disastrous naval battle, and an ambitious Dutch prince to bring about the creation of cash as we know it.
The idea of paper money goes back centuries. China used paper money for centuries, but counterfeiting drove it out of circulation in favour of silver coins by the mid-1600s.
Around the same time as China was ditching paper, London goldsmiths were writing paper certificates based on the value of gold they held on deposit for someone. The notes endorsed by these "goldsmith bankers" could circulate among multiple people before being redeemed for actual metal.
Then France's Louis XIV, the Sun King, upset the apple cart. Louis's France was the top European power of its day, and Louis loved war.
Nobody fought back harder than King William III. As the Prince of Orange and ruler of the Dutch Republic, his soggy little nation had been fighting the French for years. He happened to be married to Mary, daughter of England's King James II.
In 1688, James managed to royally offend most of his subjects, and William and Mary took part in a coup d'茅tat/revolution/invasion that put them on the throne. Now William had the combined Dutch and British navies with which to bedevil Louis!
But in 1690, things went badly during the Battle of Beachy Head. An Anglo-Dutch fleet was mauled by the French, who took temporary control of the entire English Channel, sparking fears of an invasion.
Worst of all, William's government lacked the financial wherewithal to rebuild (literally) their navy. They needed about 1.2 million pounds, in fact, but they had no hope of raising that much via taxes.
By 1694, some clever merchants and administrators had set up the Bank of England, and borrowed the money from thousands of upper- and middle-class Britons. It was the first true national debt as we'd understand it.
But rather than issue tons (and tons and tons) of silver coins as it paid back its creditors, the Bank of England issued "bank notes." These were redeemable for silver coins, yes, but why bother with all that heavy metal? These notes were for specific amounts, and personally signed by the bank's cashiers 鈥� it would take until 1725 before the bank began issuing notes in standardized denominations of between 20 and 100 pounds.
At the same time the Bank of England was being established, the Bank of Scotland was born. Although founded just after the Bank of England, it managed to issue its bank notes first, by a slim margin.
Paper money was too convenient not to invent. But it would have taken a little longer if not for a grandiose French king, his Dutch/English rival, and a naval battle gone horribly wrong.
