The earliest known form of money is a cast copper coin from the 11th century BCE, which was found in a Shang Dynasty tomb in China. Metal coins, whether made from copper, silver, gold, or other metals, have been used across the globe as units of trade and value. They have advantages - they are durable, difficult to counterfeit, and they hold intrinsic value. The big disadvantage? If you have very many of them, they get heavy.
For a couple thousand years after the coins were buried in that Shang tomb, however, merchants, traders, and customers in China had to put up with carrying coins, or with bartering goods for other goods directly. Copper coins were designed with square holes in the middle, so that they could be carried on a string. For large transactions, traders calculated the price in strings of coin. It was a workable, but unwieldy system.
During the Tang Dynasty (618 - 907), however, merchants began to leave those heavy strings of coin with a trustworthy agent, who would record how much money the merchant had on deposit on a piece of paper. The paper, a sort of promissory note, could then be traded for goods, and the seller could go to the agent and redeem the note for the strings of coins. With trade renewed along the Silk Road, this simplified cartage considerably. These privately-produced promissory notes were still not true paper currency, however.
At the beginning of the Song Dynasty (960 - 1279 CE), the government licensed specific deposit shops where people could leave their coins and receive notes. In the 1100s, Song authorities decided to take direct control of this system, issuing the world's first proper, government-produced paper money. This money was called jiaozi.
The Song established factories to print paper money with woodblocks in us to six colors of ink. The factories were located at Chengdu, Hangzhou, Huizhou, and Anqi, and used different fiber mixes in their paper to discourage counterfeiting. Early notes expired after three years, and could only be used in particular regions of the Song Empire.
In 1265, the Song government introduced a truly national currency, printed to a single standard, usable across the empire, and backed by silver or gold. It was available in denominations between one and one hundred strings of coin. This currency lasted only nine years, however, as the Song Dynasty tottered, falling to the Mongols in 1279.
The Mongol Yuan Dynasty, founded by Kublai Khan, issued its own form of paper currency called chao. Marco Polo was amazed by the idea of government-backed currency, during his stay in Kublai Khan's court. However, the paper money was not backed by gold or silver. The short-lived Yuan Dynasty printed increasing amounts of the currency, leading to run-away inflation. This problem was unresolved when the dynasty collapsed in 1368.
Although the succeeding Ming Dynasty (1368 - 1644) also began by printing unbacked paper money, it suspended the program in 1450. For much of the Ming era, silver was the currency of choice, including tons of Mexican and Peruvian ingots brought to China by Spanish traders. Only in the last two, desperate years of Ming rule did the government print paper money, as it attempted to fend off the rebel Li Zicheng and his army. China did not print paper money again until the 1890s, when the Qing Dynasty began producing yuan.