The first ever recorded use of paper money was in the 7th Century in China. However, this didn't become widespread in Europe for nearly 1, 000 years.
In the 16th Century, the goldsmith-bankers began to accept deposits, make loans and transfer funds. They also gave receipts for cash, that is to say gold coins, deposited with them. These receipts, known as 'running cash notes', were made out in the name of the depositor and promised to pay him on demand.
Many also carried the words 'or bearer' after the name of the depositor, which allowed them to circulate in a limited way. In 1694, the Bank of England was established in order to raise money for King William III's war against France. Almost immediately the Bank started to issue notes in return for deposits. Like the goldsmith's notes, the crucial feature that made Bank of England notes a means of exchange was the promise to pay the bearer the sum of the note on demand. This meant that the note could be redeemed at the Bank for gold or coinage by anyone presenting it for payment; if it was not redeemed in full, it was endorsed with the amount withdrawn. These notes were initially handwritten on Bank paper and signed by one of the Bank's cashiers. They were made out for the precise sum deposited in pounds, shillings and pence. However, after the recoinage of 1696 reduced the need for small denomination notes, it was decided not to issue any notes for sums of less than £50. Since the average income in this period was less than £20 a year, most people went through life without ever coming into contact with banknotes.
The first printed bank notes appeared in 1853 relieving the cashier of the task of filling in the name of the payee and signing each note individually. The practice of writing the name of the Chief Cashier as the payee on notes was halted in favour of the anonymous 'I promise to pay the bearer on demand the sum of ...', which has remained unchanged on notes to this day. The printed signature on the note continued to be that of one of the three cashiers until 1870, since when it has always been that of the Chief Cashier.
The Bank hasn't always been the only issuer of bank notes in England and Wales. Acts of 1708 and 1709 had given it to partial monopoly by making it unlawful for companies or partnerships of more than 6 people to set up banks and issue notes. The ban didn't extend to many provincial bankers, who were all either individuals or small family concerns. However, the Country Bankers' Act of 1826 allowed the establishment of note issuing join-stock banks with more than six partners, but not within 65 miles of London. The Act also allowed the Bank of England to open branches in major provincial cities, which gave it more outlets for its notes.
In 1833 the Bank's notes were made legal tender for all sums above £5 in England and Wales so that, in the event of a crisis, the public would still be willing to accept the Bank's notes and its billion reserves would be safeguarded. It was the 1844 Bank Charter Act which was the key to the Bank achieving its gradual monopoly of the note issue in England and Wales. Under the Act no new banks of issues could be established and existing note issuing banks were barred from expanding their issue. Those whose issues lapsed, because, for example, they merged with non-issuing bank, forfeited their right of issue. The last private bank notes in England and Wales were issued by the Somerset bank, Fox, Fowler and Co in 1921.