In the old days, goods were bartered. Then metal coins came into existence. Paper money was first issued by the Chinese government in the 12th Century. It was another 500 years before this practice moved west when the Bank of Sweden issued paper currency backed by precious metals in 1661. The rest, as they say, is history and a very colorful one at that!
Over the ages, money has taken on various forms - iron, copper, silver and gold coins, clay and porcelain, sealed leather pouches, silk, rice, paper and many more. Gold and silver regularly reappeared when these other forms of money failed.
Iron coins were used for money in China. They were over issued and subsequently fell in value. When carting around loads of iron coins for small purchases became tiresome, China's rulers introduced true felted paper to represent inconveniently large monetary multiples. Soon other banks copied this idea and bank notes rapidly grew in number, much faster than the banks' reserves. Then all the banks that had issued these notes failed, their bank notes became worthless in a flash, and ordinary citizens were left holding the (empty) bag. Those who had the bulk of their savings in precious metals were spared financial ruin, and in fact saw their Gold and Silver holdings rise in value during the crisis.
The first government issuance of paper money was by the Chinese government in 1131 AD to finance military spending. Notes were issued in rapidly increasing numbers. Before long, redemption rights into gold or silver were suspended - early hints of a capricious fiat system where citizens were at the mercy of government diktats.
The term fiat money is used for paper currency and coins issued by a government as legal tender for the trading of goods and services, backed only by the full faith and credit of the government but not by tangible assets such as Gold. Most national currencies, including the US dollar and the Euro, are fiat money. History of the U.S. Dollar
Before the U.S. dollar was issued, the United Colonies issued the first batch of Continental Currency on June 23, 1775 - a total of 2 million dollars to finance the Revolutionary War, backed by the government’s anticipation of tax receipts when peace returned after the war.
This paper was freely exchangeable for gold or silver. For instance, a Seven Dollar note would typically state, “This Bill entitles the bearer to receive seven Spanish milled dollars, or the value thereof in Gold or Silver…”
Eventually millions of Continental Dollars were issued - to the point where, by 1780, it took 75 continental dollars to buy one silver dollar. The continental dollar had massively depreciated because too much of it had been printed.