from http://islaminchina.wordpress.com/20...islamic-world/Paper money was first invented in China in the 13th century and soon made its way to Islamic world. In both of these places it did not survive for long. Paper money was first introduced in the Islamic world by the Mongol ruler Gaykhatu of the Il-Khan dynasty who ruled the present day Iran, Iraq and Afghanistan. However the experiment did not succeed. In China paper money was used for much longer but its used died out until it was reintroduced by the Western world. Interestingly the paper money issued in the Islamic lands had both Arabic and Chinese text. Here is a relevant excerpt from applied history tutorial from University of Calgary.
Gaykhatu, who succeeded him. Eager to make a name for himself as an Il-Khan, Gaykhatu introduced paper money from China into Islamic trading circles. Islamic merchants in the Il-Khanate refused to accept the unrecognisable new money, however, and trade came to a virtual standstill. The experiment was such a disaster that Gaykhatu was forced to abandon it after six months, and the ensuing rebellion ousted him from power in 1295.