Which country first used paper money?

Answer

Paper notes appeared during the Tang and Song dynasties.

Context

Paper money developed in China in stages. Britannica notes that the Song dynasty first allowed printed paper money for limited regional use and then made it legal tender across the whole country, describing China as the first to do so. Historians usually trace the roots to merchants' deposit receipts in the Tang era and to Sichuan, where heavy iron coins made large payments awkward; the paper notes known as jiaozi appeared there around the 11th century and were later taken over by the government.

The Yuan dynasty went further. Britannica says Kublai Khan made paper the only legal currency across his empire in 1260, and Marco Polo's account of this practice helped introduce the idea to Europeans. Later, over-issuing notes led to inflation under the Yuan, and under the Ming dynasty the paper was never convertible to metal, so its value collapsed. The Chinese experience is therefore an early example of both the convenience and the danger of unbacked paper.

Europe came much later. Britannica says the Stockholms Banco, founded in 1656, is known to have issued banknotes earlier than the Bank of England, which is usually credited with the first widely circulating banknotes in the West. Exact dates for the earliest Chinese notes are debated among historians, and whether private receipts or official notes count as 'first' is partly a matter of definition.