Banknotes with a face value of 5000 of different currencies.

A banknote (often known as a bill, paper money or simply a note) is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money. Traditional banknotes have largely been replaced with national banknotes issued by governments or central banks. National banknotes usually have legal tender status and are accepted at face value without discounting. National banknotes of Western countries have a history of backing in gold or silver and sometimes both; however, most of today's national banknotes have no backing in precious metals or commodities and have value only by fiat. With the exception of non-circulating high-value or precious metal issues, coins are used for lower valued monetary units, while banknotes are used for higher values.

A primitive version of the banknote was seen in the Han Dynasty in 118 BC, it was made of leather. ^[1] However the first known banknote was first developed in China during the Tang and Song dynasties, starting in the 7th century. Its roots were in merchant receipts of deposit during the Tang Dynasty (618–907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions.^[2][3][4] During the Yuan Dynasty, banknotes were adopted by the Mongol Empire. In Europe, the concept of banknotes was first introduced during the 13th century, with proper banknotes appearing in the 17th century.

Advantages and disadvantages[link]

Originally, precious and semi-precious metals were made into coins and were used to negotiate and settle trades. Banknotes offer an alternative bearer form of money, but the advantages and disadvantages between the two forms of bearer money are complex and so in different circumstances the overall advantage can lie with either form.

The main disadvantage of banknotes compared to precious metals is that banknotes are, indirectly, a claim against assets whereas precious metals are an asset. Banknotes therefore have counter-party risks, such as insolvency and dilution (inflation).

Other costs of using bearer money include:

1. Discounting. Before national currencies and efficient clearing houses, banknotes were only redeemable at face value at the issuing bank. Even a branch bank could discount notes of other branches of the same bank. The discounts usually increased with distance from the issuing bank. The discount also depended on the perceived safety of the bank. When banks failed the notes were worthless.^[5] The problem of discounting within a country does not exist with national currencies; however, under floating exchange rates currencies are valued relative to one another in the foreign exchange market.
2. Counterfeiting paper notes has always been a problem, especially since the introduction of color photocopiers and computer image scanners. Numerous banks and nations have incorporated many types of countermeasures in order to keep the money secure; however, extremely sophisticated counterfeit notes known as superdollars have been detected in recent years.
3. Manufacturing or issue costs. Coins are produced by industrial manufacturing methods that process the precious or semi-precious metals, and require additions of alloy for hardness and wear resistance. By contrast bank notes are printed paper (or polymer), and typically have a higher cost of issue, especially in larger denominations, compared to coin of the same value.
4. Wear costs. Banknotes lose economic value by wear, since, even if they are in poor condition, they are still a legally valid claim on the issuing bank. However, banks of issue do have to pay the cost of replacing banknotes in poor condition and paper notes wear out much faster than coins.
5. Cost of transport. Coins can be expensive to transport for high value transactions, but banknotes can be issued in large denominations that are lighter than the equivalent value in coins.
6. Cost of acceptance. Coins can be checked for authenticity by weighing and other forms of examination and testing. These costs can be significant, but good quality coin design and manufacturing can help reduce these costs. Banknotes also have an acceptance cost, the costs of checking the banknote's security features and confirming acceptability of the issuing bank.

The different disadvantages between coins and banknotes imply that there may be an ongoing role for both forms of bearer money, each being used where its advantages outweigh its disadvantages.

History[link]

Paper currency was first developed in China in the Tang Dynasty during the 7th century and was later introduced in the Mongol Empire, Europe, and America. Paper money originated in two forms: drafts, which are receipts for value held on account, and "bills", which were issued with a promise to convert at a later date.

The perception of banknotes as money has evolved over time. Originally, money was based on precious metals. Banknotes were seen as essentially an I.O.U. or promissory note: a promise to pay someone in precious metal on presentation (see representative money). With the gradual removal of precious metals from the monetary system, banknotes evolved to represent credit money, or (if backed by the credit of a government) also fiat money.

Notes or bills were often referred to in 18th century novels and were often a key part of the plot such as a "note drawn by Lord X for £100 which becomes due in 3 months' time".

Money prior to the banknote[link]

Money is based on the coming to pre-eminence of some commodity as payment. The oldest monetary basis was for agricultural capital: cattle and grain. In Ancient Mesopotamia, drafts were issued against stored grain as a unit of account. A "drachma" was a weight of grain. Japan's feudal system was based on rice per year – koku.

At the same time, legal codes enforced the payment for injury in a standardized form, usually in precious metals. The development of money then comes from the role of agricultural capital and precious metals having a privileged place in the economy.

Such drafts were used for giro systems of banking as early as Ptolemaic Egypt in the 1st century BC.

Development in China[link]

Song Dynasty Jiaozi, the world's earliest paper money

Banknotes in the Tang Dynasty[link]

The banknote was first developed in China in the Tang Dynasty during the 7th century, with local issues of paper currency. Its roots were in merchant receipts of deposit during the Tang Dynasty (618–907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions.^[2][3][4]

Before the use of paper, the Chinese used coins that were circular, with a rectangular hole in the middle. Several coins could be strung together on a rope. Merchants in China, if they became rich enough, found that their strings of coins were too heavy to carry around easily. To solve this problem, coins were often left with a trustworthy person, and the merchant was given a slip of paper recording how much money he had with that person. If he showed the paper to that person he could regain his money. Eventually, the Song Dynasty paper money called "jiaozi" originated from these promissory notes.

Banknotes in the Song Dynasty[link]

By 960 the Song Dynasty, short of copper for striking coins, issued the first generally circulating notes. A note is a promise to redeem later for some other object of value, usually specie. The issue of credit notes is often for a limited duration, and at some discount to the promised amount later. The jiaozi nevertheless did not replace coins during the Song Dynasty; paper money was used alongside the coins.

Huizi currency currency, issued in 1160.

The central government soon observed the economic advantages of printing paper money, issuing a monopoly right of several of the deposit shops to the issuance of these certificates of deposit.^[6] By the early 12th century, the amount of banknotes issued in a single year amounted to an annual rate of 26 million strings of cash coins.^[7] By the 1120s the central government officially stepped in and produced their own state-issued paper money (using woodblock printing).^[6]

Even before this point, the Song government was amassing large amounts of paper tribute. It was recorded that each year before 1101 AD, the prefecture of Xinan (modern Xi-xian, Anhui) alone would send 1,500,000 sheets of paper in seven different varieties to the capital at Kaifeng.^[8] In that year of 1101, the Emperor Huizong of Song decided to lessen the amount of paper taken in the tribute quota, because it was causing detrimental effects and creating heavy burdens on the people of the region.^[9] However, the government still needed masses of paper product for the exchange certificates and the state's new issuing of paper money. For the printing of paper money alone, the Song court established several government-run factories in the cities of Huizhou, Chengdu, Hangzhou, and Anqi.^[9]

The size of the workforce employed in these paper money factories were quite large, as it was recorded in 1175 AD that the factory at Hangzhou alone employed more than a thousand workers a day.^[9] However, the government issues of paper money were not yet nationwide standards of currency at that point; issues of banknotes were limited to regional zones of the empire, and were valid for use only in a designated and temporary limit of 3-year's time.^[7]

The geographic limitation changed between the years 1265 and 1274, when the late Southern Song government finally produced a nationwide standard currency of paper money, once its widespread circulation was backed by gold or silver.^[7] The range of varying values for these banknotes was perhaps from one string of cash to one hundred at the most.^[7] Ever since 1107, the government printed money in no less than six ink colors and printed notes with intricate designs and sometimes even with mixture of unique fiber in the paper to avoid counterfeiting.

A Yuan dynasty printing plate and banknote

Banknotes in the Mongol Empire[link]

The founder of the Yuan Dynasty, Kublai Khan, issued paper money known as Chao in his reign. The original notes during the Yuan Dynasty were restricted in area and duration as in the Song Dynasty, but in the later course of the dynasty, facing massive shortages of specie to fund their ruling in China, began printing paper money without restrictions on duration.

The Venetian merchants were impressed by the fact that the Chinese paper money was guaranteed by the State and not by the private merchant or private banker as they did in the West.

Banknotes in Europe[link]

The term comes from the notes of the bank ("nota di banco"), and dates from fourteenth century, it originally recognized the right of the holder of the note to collect the precious metal (usually gold or silver) deposited with a banker (a currency account). In the fourteenth century, it was used in every part of Europe, and in Italian city-state merchants colonies outside of Europe. For international payments, the more efficient and sophisticated bill of exchange ("lettera di cambio"), that is, a promissory note based on a virtual currency account (usually a coin no longer physically existing), was used more often. All physical currencies were physically related to this virtual currency, this instrument also served as credit.

In the 13th century, Chinese paper money became known in Europe through the accounts of travelers, such as Marco Polo and William of Rubruck.^[10] In medieval Italy and Flanders, because of the insecurity and impracticality of transporting large sums of money over long distances, money traders started using promissory notes. In the beginning these were personally registered, but they soon became a written order to pay the amount to whoever had it in their possession. These notes can be seen as a predecessor to regular banknotes.^[11]

The first European banknotes were issued by Stockholms Banco, a predecessor of the Bank of Sweden, in 1661,^[12] although the bank ran out of coins to redeem its notes in 1664 and ceased operating in that year.

Until Louis XIV, French banknotes were issued by small creditors, had limited circulation, and were not backed by the authority of the state. The Scottish economist John Law helped establish banknotes as formal currency, backed by capital consisting of French government bills and government-accepted notes.

Banknotes in the United States[link]

Fifty-five dollar bill in Continental currency; leaf design by Benjamin Franklin, 1779

In the early 1690s, the Massachusetts Bay Colony was the first of the Thirteen Colonies to issue permanently circulating banknotes. The use of fixed denominations and printed banknotes came into use in the 18th century.

In the early 18th century each of the thirteen colonies issued their own banknotes. During the American Revolutionary War, the Continental Congress issued Continental currency to finance the war. The federal government of the United States did not print banknotes until 1862. However, almost immediately after adoption of the United States Constitution in 1789, the United States Congress chartered the First Bank of the United States and authorized it to issue banknotes. The bank served as quasi-central bank of the United States. The bank closed in 1811 when Congress failed to renew its charter. In 1816, Congress chartered the Second Bank of the United States. When its charter expired in 1836, the bank continued to operate under a charter granted by the Commonwealth of Pennsylvania until 1841.

Cotton bills of exchange were also used as money, but they were not banknotes. They were given to planters in exchange for their cotton, but were not paid in gold or notes until the cotton was sold in Liverpool. Any deficiency would reduce the amount to be paid on the bill of exchange. The bills were redeemable when notice was sent back to the United States. In the meantime the bill of exchange holder could trade the note at a discount, and the notes circulated as money.^[14]

In the early history of the United States there was no national currency and an insufficient supply of coinage.^[15] Banknotes were the majority of the money in circulation. During financial crises many banks failed and their notes became worthless. Also, banknotes were discounted relative to gold and silver, the discount depending on the financial strength of the bank.^[5]

The Confederate Congress met in Montgomery, Alabama on 9 March 1861 and authorized the issuing of paper currency (in the form of interest-bearing notes). Such notes were originally printed by the National Bank Note Co.^[16]

In the United States, public acceptance of banknotes in replacement of precious metals was hastened in part by Executive Order 6102 in 1933. This order carried the threat of a maximum $10,000 fine and a maximum of ten years in prison for anyone who kept more than $100 of gold in preference to banknotes.

Issue of banknotes[link]

Generally, a central bank or treasury is solely responsible within a state or currency union for the issue of banknotes. However, this is not always the case, and historically the paper currency of countries was often handled entirely by private banks. Thus, many different banks or institutions may have issued banknotes in a given country. In the United States, commercial banks were authorized to issue banknotes from 1863 to 1935. In the last of these series, the issuing bank would stamp its name and promise to pay, along with the signatures of its president and cashier on a preprinted note. By this time, the notes were standardized in appearance and not too different from the Federal Reserve Notes that circulated for most of the 20th century.

In a small number of countries, private banknote issue continues to this day. For example, by virtue of the complex constitutional setup in the United Kingdom, certain commercial banks in two of the union's four constituent countries (Scotland and Northern Ireland) continue to print their own banknotes for domestic circulation, even though they are not fiat money or declared in law as legal tender anywhere. The UK's central bank, the Bank of England, prints notes which are legal tender in England and Wales; these notes are also usable as money (but not legal tender) in the rest of the UK (see Banknotes of the pound sterling).

In Hong Kong, three commercial banks are licenced to issue Hong Kong dollar notes.^[17] As well as commercial issuers, other organizations may have note-issuing powers; for example, until 2002 the Singapore dollar was issued by the Board of Commissioners of Currency Singapore, a government agency which was later taken over by the Monetary Authority of Singapore.^[17]

Materials used for banknotes[link]

A US twenty-dollar paper banknote

Paper banknotes[link]

Most banknotes are made from cotton paper (see also paper) with a weight of 80 to 90 grams per square meter. The cotton is sometimes mixed with linen, abaca, or other textile fibres. Generally, the paper used is different from ordinary paper: it is much more resilient, resists wear and tear (the average life of a banknote is two years),^[18] and also does not contain the usual agents that make ordinary paper glow slightly under ultraviolet light. Unlike most printing and writing paper, banknote paper is infused with polyvinyl alcohol or gelatin to give it extra strength. Early Chinese banknotes were printed on paper made of mulberry bark and this fiber is used in Japanese banknote paper today.

Most banknotes are made using the mould made process in which a watermark and thread is incorporated during the paper forming process. The thread is a simple looking security component found in most banknotes. It is however often rather complex in construction comprising fluorescent, magnetic, metallic and micro print elements. By combining it with watermarking technology the thread can be made to surface periodically on one side only. This is known as windowed thread and further increases the counterfeit resistance of the banknote paper. This process was invented by Portals, part of the De La Rue group in the UK. Other related methods include watermarking to reduce the number of corner folds by strengthening this part of the note, coatings to reduce the accumulation of dirt on the note, and plastic windows in the paper that make it very hard to copy.

Counterfeiting and security measures on paper banknotes[link]

The ease with which paper money can be created, by both legitimate authorities and counterfeiters, has led both to a temptation in times of crisis such as war or revolution to produce paper money which was not supported by precious metal or other goods, thus leading to hyperinflation and a loss of faith in the value of paper money, e.g. the Continental Currency produced by the Continental Congress during the American Revolution, the Assignats produced during the French Revolution, the paper currency produced by the Confederate States of America and the Individual States of the Confederate States of America, the financing of World War I by the Central Powers (by 1922 1 gold Austro-Hungarian krone of 1914 was worth 14,400 paper Kronen), the devaluation of the Yugoslav Dinar in the 1990s, etc. Banknotes may also be overprinted to reflect political changes that occur faster than new currency can be printed.

In 1988, Austria produced the 5000 Schilling banknote (Mozart), which is the first foil application (Kinegram) to a paper banknote in the history of banknote printing. The application of optical features is now in common use throughout the world.

Many countries' banknotes now have embedded holograms.

Polymer banknotes[link]

In 1983, Costa Rica and Haiti issued the first Tyvek and the Isle of Man issued the first Bradvek polymer (or plastic) banknotes; these were printed by the American Banknote Company and developed by DuPont. In 1988, after significant research and development by the Commonwealth Scientific and Industrial Research Organisation (CSIRO) and the Reserve Bank of Australia, Australia produced the first polymer banknote made from biaxially-oriented polypropylene (plastic), and in 1996 became the first country to have a full set of circulating polymer banknotes of all denominations. Since then, other countries to adopt circulating polymer banknotes include Bangladesh, Brazil, Brunei, Canada, Chile, Guatemala, Dominican Republic, Indonesia, Israel, Malaysia, Mexico, Nepal, New Zealand, Papua New Guinea, Paraguay, Romania, Samoa, Singapore, the Solomon Islands, Sri Lanka, Thailand, Vietnam, and Zambia, with other countries issuing commemorative polymer notes, including China, Kuwait, the Northern Bank of Northern Ireland, Taiwan and Hong Kong.^[19] Another country indicating plans to issue polymer banknotes is Nigeria. In 2005, Bulgaria issued the world's first hybrid paper-polymer banknote.

Polymer banknotes were developed to improve durability and prevent counterfeiting through incorporated security features, such as optically variable devices that are extremely difficult to reproduce.

Other materials[link]

Over the years, a number of materials other than paper have been used to print banknotes. This includes various textiles, including silk, and materials such as leather.

Silk and other fibers have been commonly used in the manufacture of various banknote papers, intended to provide both additional durability and security. Crane and Company patented banknote paper with embedded silk threads in 1844 and has supplied paper to the United States Treasury since 1879. Banknotes printed on pure silk "paper" include "emergency money" Notgeld issues from a number of German towns in 1923 during a period of fiscal crisis and hyperinflation. Most notoriously, Bielefeld produced a number of silk, leather, velvet, linen and wood issues, and although these issues were produced primarily for collectors, rather than for circulation, they are in demand by collectors. Banknotes printed on cloth include a number of Communist Revolutionary issues in China from areas such as Xinjiang, or Sinkiang, in the United Islamic Republic of East Turkestan in 1933. Emergency money was also printed in 1902 on khaki shirt fabric during the Boer War.

Leather banknotes (or coins) were issued in a number of sieges, as well as in other times of emergency. During the Russian administration of Alaska, banknotes were printed on sealskin. A number of 19th century issues are known in Germanic and Baltic states, including the towns of Dorpat, Pernau, Reval, Werro and Woisek. In addition to the Bielefeld issues, other German leather Notgeld from 1923 is known from Borna, Osterwieck, Paderborn and Pößneck.

Other issues from 1923 were printed on wood, which was also used in Canada in 1763–1764 during Pontiac's Rebellion, and by the Hudson's Bay Company. In 1848, in Bohemia, wooden checkerboard pieces were used as money.

Even playing cards were used for currency in France in the early 19th century, and in French Canada from 1685 until 1757, in the Isle of Man in the beginning of the 19th century, and again in Germany after World War I.

Vending machines and banknotes[link]

People are not the only economic actors who are required to accept banknotes. In the late 20th century vending machines were designed to recognize banknotes of the smaller values long after they were designed to recognize coins distinct from slugs. This capability has become inescapable in economies where inflation has not been followed by introduction of progressively larger coin denominations (such as the United States, where several attempts to make dollar coins popular in general circulation have largely failed). The existing infrastructure of such machines presents one of the difficulties in changing the design of these banknotes to make them less counterfeitable, that is, by adding additional features so easily discernible by people that they would immediately reject banknotes of inferior quality, for every machine in the country would have to be updated.

Destruction[link]

Banknotes last on an average of three years until it is no longer fit for circulation, after which they are collected for destruction, usually recycling or shredding.^[20] A banknote is removed from the money supply by banks or other financial institutions because of everyday wear and tear from its handling. Banknote bundles are passed through a sorting machine that determines whether a particular note needs to be shredded, or are removed from the supply chain by a human inspector if they are deemed unfit for continued use – for example, if they are mutilated or torn. Counterfeit banknotes are destroyed unless they are needed for evidentiary or forensic purposes.

Contaminated banknotes are also decommissioned. A Canadian government report indicates:

Types of contaminants include: notes found on a corpse, stagnant water, contaminated by human or animal body fluids such as urine, feces, vomit, infectious blood, fine hazardous powders from detonated explosives, dye pack and/or drugs...^[21]

These are removed from circulation primarily to prevent the spread of diseases.

When taken out of circulation, Australian bank notes are melted down and mixed together to form plastic garbage bins.^[22]

Intelligent Banknote Neutralisation System (IBNS)[link]

Intelligent Banknote Neutralisation System (IBNS) is a security system which is rendering banknotes unusable by marking them permanently as stolen with a degradation agent. Marked (stained) banknotes cannot be brought back into circulation easily and can be linked to the crime scene. Today's most used degradation agent is a special security ink which cannot be removed from the banknote easily and not without destroying the banknote itself, but other agents also exist. Today IBNS are used to protect banknotes in ATM's, Retail Machines and during cash-in-transit operations.

Displacement by electronic currency[link]

Banknotes have increasingly been displaced by credit and debit cards and electronic money transfers. Some governments, such as Canada, are considering replacing paper notes and coins with digital currency.^[23].^[24] Sweden has begun implementing digital currency.^[25]

Paper money collecting as a hobby[link]

Banknote collecting, or Notaphily, is a slowly growing area of numismatics. Although generally not as widespread as coin and stamp collecting, the hobby is slowly expanding. Prior to the 1990s, currency collecting was a relatively small adjunct to coin collecting, but the practice of currency auctions, combined with larger public awareness of paper money have caused a little interest and values of rare banknotes.

Sanjay Relan, of Hong Kong is holding the Guinness world record since 2007 for collecting 221 banknotes representing 221 different countries. He also held the Guinness world record in 2007 for a short period for collecting 235 coins representing 235 different countries.^[26]

Trades[link]

For years, the mode of collecting banknotes was through a handful of mail order dealers who issued price lists and catalogs. In the early 1990s, it became more common for rare notes to be sold at various coin and currency shows via auction. The illustrated catalogs and "event nature" of the auction practice seemed to fuel a sharp rise in overall awareness of paper money in the numismatic community. Entire advanced collections are often sold at one time, and to this day single auctions can generate millions in gross sales. Today, eBay has surpassed auctions in terms of highest volume of sales of banknotes although the risk of counterfeit is extremely high.^[27][28][29] However, rare banknotes still sell for much less than comparable rare coins. This disparity is diminishing as paper money prices continue to rise. Many rare and historical banknotes have sold for more than a million dollars.^[30]

There are many different organizations and societies around the world for the hobby, including the International Bank Note Society (IBNS) which currently has over 1800 member in more than 100 countries.^[31]

See also[link]

Numismatics portal

Notes[link]

References[link]

This article lacks ISBNs for the books listed in it. Please make it easier to conduct research by listing ISBNs. If the {{Cite book}} or {{citation}} templates are in use, you may add ISBNs automatically, or discuss this issue on the talk page. (March 2012)

• Bowman, John S. (2000). Columbia Chronologies of Asian History and Culture. New York: Columbia University Press.
• Ebrey, Walthall, Palais, (2006). East Asia: A Cultural, Social, and Political History. Boston: Houghton Mifflin Company.
• Gernet, Jacques (1962). Daily Life in China on the Eve of the Mongol Invasion, 1250–1276. Stanford: Stanford University Press. ISBN 0-8047-0720-0
• Needham, Joseph (1986). Science and Civilisation in China: Volume 5, Part 1. Cambridge University Press

External links[link]

Media related to Banknotes at Wikimedia Commons

Wikisource has the text of the 1911 Encyclopædia Britannica article Bank-Notes.

• Shishanov V. The Assignats of 1802–1803