Jiaozi (Chinese: ) was a form of promissory note which appeared around the 11th century in the Sichuan capital of Chengdu, China. Numismatists regard it as the first paper money in history, a development of the Chinese Song Dynasty (960-1279 CE). Early Jiaozi notes did not have standard denominations but were denominated according to the needs of the purchaser and ranged from 500 wén to 5 guàn. The government office that issued these notes or the Jiaozi wu (Chinese: ) demanded a payment or exchange fee (Chinese: ) of 30 wén per guàn exchanged from coins to banknote. The Jiaozi were usually issued biannually. In the region of Liang-Huai (Chinese: ) these banknotes were referred to as Huaijiao () and were introduced in 1136 but their circulation stopped quickly after their introduction. Generally the lower the denominations of the Jiaozi the more popular they became, and as the government initially wasn't able to properly regulate their production, their existence eventually lead to undesirably high rates of inflation.
The Jiaozi was first used in present-day Sichuan by a private merchant enterprise. They were issued to replace the heavy coins () that circulated at the time. These early Jiaozi were issued in high denominations such as 1000 qiàn, which was equal to one thousand coins that weighed about twenty five kilograms at the time.
Privately issued Jiaozi notes contained the name of the issuing merchant company, serial numbers and seals marked with decorative patterns as a form of security. As denominations were not standard their nominal value was annually added by the issuing company. During the first 5 years of circulation there were no standard designs or limitations for the Jiaozi but after 5 years the sixteen largest Sichuanese merchant companies founded the Paper Note Bank (Jiaozi hu , or Jiaozi bu ) which standardised banknotes for them to eventually become a recognised form of currency by the local government with a standard exchange fee of 30 wén per string of cash in paper currency.
As bankruptcy plagued several merchant companies the government nationalised and managed the production of paper money and founded the Jiaozi wu () in 1023. The first series of standard government notes was issued in 1024 with denominations such as 1 guàn (?, or 700 wén), 1 mín (?, or 1000 wén), up to 10 guàn. In 1039 only banknotes of 5 and 10 guàn were issued, and in 1068 a denomination of 1 guàn was introduced which became 40% of all circulating Jiaozi banknotes.
As these notes caused inflation Emperor Huizong decided in 1105 to replace the Jiaozi with a new form of banknote called the Qianyin (). Despite this inflation kept growing and a nominal mín was only exchanged for a handful of cash coins. The root cause of this inflation was attributed to the fact that the Song government didn't back their paper money up with a sufficient number of coins. The Song decided to raise the amount of stocked coins, yet in vain as it did not curb the inflation. Despite there only being around seven hundred thousand iron cash coins in circulation around 3.780.000 mín of banknotes were in circulation which rose to 4.140.000 mín, while an additional 5,300,000 mín in banknotes were issued in 1204 at which point between 400 and as low as 100 cash coins were accepted per 1 mín (of paper currency with a face value of 1000 coins cash). Local governments such as the Sichuanese government had to sell off tax exemption certificates, silver, gold and titles of its offices because of the inflationary policies around paper money. One of the causes of inflation was the outflow of currency to the neighbouring Jin dynasty to the north, which is why iron cash coins were introduced in border regions.[dead link] In 1192 the exchange rate between iron cash coins and Jiaozi banknotes was fixed at 770 wén per guàn by Emperor Guangzong, but inflation would still remain an issue despite these measures.
Despite the fact that all Jiaozi could be freely exchanged into cash coins their high denomination limited their use to large transactions. Rather than only being exchanged in coins, Jiaozi were often redeemed in Dudie certificates (, a tax exemption certificate for Buddhist monks and nuns), silver, and gold. Eventually the Song government set an expiration date of 2 years for each Jiaozi, which in 1199 was raised to 3 years, after which they had to be either redeemed or replaced by newer series. The government officially restricted the amount of Jiaozi that could be in circulation to 1,255,340 mín, and were covered by only a fifth of that in copper cash coins. As these Jiaozi banknotes proved their usability private merchants began issuing their own notes in the north of the country and members of the military would receive their pay in paper money.