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k]So… wrote:

So… you're going to solve that by instituting a paper-based exchange system where initially the paper is exchangeable for gold and that eventually gets phased out when the Plebes realize that handing actual gold back and forth is inconvenient and dumb, right? Wrong. Remember that this is the Iron Age, and people haven't invented Nationalism yet. The cornerstone of the Greenback currency is a belief in the nation that prints it – and nations simply don't exist. You've got empires, and you've got kingdoms, and you've got tribes, and you've got unincorporated villages… and that's it as far as civilization goes. When you look at a map in D&D and a colored region has a name on it, that's the name of the region. Possibly it's even the name of some guy in the region. The point is, that it's not a country in the modern sense of the word, so if some new guy walks in who's bad enough the next cartographer will put his name on the region instead.

And that means that "The Full Faith and Credit of the Kingdom of Daxall" is worth precisely nothing. And while King Daxall can, through force of arms, take all the gold away from all the peasants and get them to trade pieces of paper for goods and services in its place – noone will actually believe that the paper is currency. They're literally trading promises by King Daxall that he'll let them have their money back if they leave town. And since the serfs can't even leave town, even that promise is meaningless to them. A serf accepts paper for goods and services only because he'll be beheaded if he doesn't. The black market value of these pieces of paper is pretty close to zero. Worse, nearby governments will see this as a blatant attempt to sequester all the gold in King Daxall's pants and will probably declare war (in addition to the fact that noone outside the reach of King Daxall's pikemen will accept Daxall Dollars).

Well, actually, paper money (called bank notes for a reason) were first issued by, well, banks, not central governments, usually as a result of a shortage of metal to make coinage.  Since metal isn't that valuable in D&D economies, I could see bank notes being issues based on gems or megical materials or magic items.  It doesn't have to be in everyday use for it to be valuable for big ticket purchases after all, it just needs to be accepted by the major traders and merchants.

And while I realize you are stipulating an Iron Age culture, most D&D societies seem to have elements from more sophisticated societies mixed in.  And while paper money is historically a later thing, a form of letter of credit, the giro seems to date back to at least the first century AD.  It seems to me given the long-lived entities and their powers of revenge, an inter-planar system of private banks capable of issuing their own notes might emerge to make it easier to move wealth around.

K]The first paper money, not to be confused with contracts and promissary notes (which date back to the Babylonian days or before), date back to the 900s in China and were indeed issued by the government as a method of holding on to the metal supply. This "flying money" was pretty unpopular because people didn't really believe it had value.

OK, you have me there, but that still doesn't explain why the high-end magical economy isn't using letters of credit and similar instruments for expensive purchases. Teleport makes the whole idea much wrote: