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The Precursor to Paper Money: Promissory Notes

A promissory note, sometimes referred to as a note payable, is a legal instrument, in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms.

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A promissory note issued by the Second Bank of the United States, December 15, 1840

Historically, promissory notes have acted as a form of privately issued currency. Flying cash or feiqian was a promissory note used during the Tang dynasty (618 – 907). Flying cash was regularly used by Chinese tea merchants, and could be exchanged for hard currency at provincial capitals. The Chinese concept of promissory notes was introduced by Marco Polo to Europe.

According to tradition, in 1325 a promissory note was signed in Milan. However, according to a travelogue of a visit to Prague in 960 by Ibrahim ibn Yaqub, small pieces of cloth were used as a means of trade, with these cloths having a set exchange rate versus silver. Around 1150 the Knights Templar issued promissory notes to pilgrims, pilgrims deposited their valuables with a local Templar preceptory before embarking, received a document indicating the value of their deposit, then used that document upon arrival in the Holy Land to retrieve their funds in an amount of treasure of equal value.

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A 1926 Promissory Note from the Imperial Bank of India, Rangoon, Burma

 

here is evidence of promissory notes being issued in 1384 between Genoa and Barcelona, although the letters themselves are lost. The same happens for the ones issued in Valencia in 1371 by Bernat de Codinachs for Manuel d’Entença, a merchant from Huesca (then part of the Crown of Aragon), amounting a total of 100 florins. In all these cases, the promissory notes were used as a rudimentary system of paper money, for the amounts issued could not be easily transported in metal coins between the cities involved. Ginaldo Giovanni Battista Strozzi issued an early form of promissory note in Medina del Campo (Spain), against the city of Besançon in 1553. However, there exists notice of promissory notes being in used in Mediterranean commerce well before that date.

In 1930, under the League of Nations, a Convention providing a uniform law for bills of exchange and promissory notes was drafted and ratified by eighteen nations. Article 75 of the treaty stated that a promissory note shall contain:

  • The term “promissory note” inserted in the body of the instrument and expressed in the language employed in drawing up the instrument
  • An unconditional promise to pay a determinate sum of money;
  • A statement of the time of payment;
  • A statement of the place where payment is to be made;
  • The name of the person to whom or to whose order payment is to be made;
  • A statement of the date and of the place where the promissory note is issued;
  • The signature of the person who issues the instrument (maker).
    Worldwide

Promissory Notes were created to certify exchanges of goods and/or coins and served as a placeholder to the amount of wealth that an individual was owed. Promissory Notes were not always sanctioned by law and thus there was a need for a unified note, which led to paper money. Paper money was easier to use and trust than verbal agreements or written Promissory Notes.

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