Paper money was used first by the Chinese during the Tang Dynasty (A.D. 618 to 907). According to Time, the first forms of paper money were privately issued bills of credit or exchange. This practice continued for about 500 years.
It wasn't until the 1100s that the first government-controlled paper money was created in China. According to Kallie Szczepnaski of About.com, China later suspended the paper money in 1450 after it created a financial crisis. China started using the paper money again in the 1890s. Europe was the first after China to start using banknotes and then, during the following two centuries, this practice spread to the rest of the world.