Tallies weren’t just used for loans, but for any sort of contract—which is why early paper contracts also had to be cut in half and one half kept by each party. With paper contracts, there was a definite tendency for the creditor’s half to function as an IOU and thus become transferable.
By 806 AD, for instance, right around the apogee of Chinese Buddhism, merchants moving tea over long distances from the far south of the country and officials transporting tax payments to the capital, all of them concerned with the dangers of carrying bullion over long distances, began to deposit their money with bankers in the capital and devised a system of promissory notes.
They were called “Flying Cash,” also divided in half, like tallies, and redeemable for cash in their branches in the provinces.
They quickly started passing from hand to hand and operated something like currency. The government first tried to forbid their use, then a year or two later—and this became a familiar pattern in China—when it realized that it could not suppress them, switched gears and established a bureau empowered to issue such notes themselves.
By the early Song dynasty (960–1279 AD), local banking operations all over China were running similar operations, accepting cash and bullion for safekeeping and allowing depositors to use their receipts as promissory notes, as well as trading in government coupons for salt and tea.
Many of these notes came to circulate as de facto money.
The government, as usual, first tried to ban the practice, then control it (granting a monopoly to sixteen leading merchants), then, finally, set up a government monopoly—the Bureau of Exchange Medium, established in 1023—and before long, aided by the newly invented printing press, was operating factories in several cities employing thousands of workers and producing literally millions of notes.
At first, this paper money was meant to circulate for a limited time (notes would expire after two, then three, then seven years) and was redeemable in bullion. Over time, especially as the Song came under increasing military pressure, the temptation to simply print money with little or no backup became overwhelming—and, moreover, Chinese governments were rarely completely willing to accept their own paper money for tax purposes.
Combine this with the fact that the bills were worthless outside China, and it’s rather surprising that the system worked at all. Certainly, inflation was a constant problem and the money would periodically have to be recalled and reissued.
Occasionally, the whole system would break down, but then people would resort to their own expedients: “privately issued tea checks, noodle checks, bamboo tallies, wine tallies, etc.”
Still, the Mongols, who ruled China from 1271 to 1368 AD, chose to maintain the system, and it was only abandoned in the seventeenth century.