 A £20 Ulster Bank banknote. A banknote (more commonly known as a bill in the United States) is a kind of currency, issued as legal tender. With coins, banknotes make up the cash forms of all modern money. With the exception of non-circulating high-value or precious metal commemorative issues, coins are generally used for lower valued monetary units, while banknotes are utilised for higher values.
Banknotes were first issued because carrying around a lot of precious metal was cumbersome and often dangerous. Banknotes were originally a claim to an amount of precious metal stored in a vault somewhere. In this way the stored value (usually in gold or silver coins) backing the banknote could transfer ownership in exchange for goods or services. The ability to exchange a note for some other kind of value is called "convertibility", for example a US silver certificate from the early 20th century was "payable in silver on demand" from the Treasury. If a note is payable in demand for a fixed unit, it is said to be fully convertible to that unit. Limited convertibility occurs when there are restrictions in the time, place, manner or amount of exchange.
History of paper money
Paper money originated in two forms: drafts, that is receipts for value held on account, and "bills", which were issued with a promise to convert at a later date.
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 first century BC.
However the use of paper money as a circulating medium is intimately related to shortages of metal for coins. In the 600s there were local issues of paper currency in China and by 960 the Chinese Empire, 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 original notes were restricted in area and duration, but the Yuan Dynasty, facing massive shortages of specie to fund their occupation of China, began printing paper money without restrictions on duration. By 1455, in an effort to rein in economic expansion and end hyperinflation, the new Ming Dynasty ended paper money, and closed much of Chinese trade.
In Europe the first banknotes were issued by Stockholms Banco, a predecessor of the Bank of Sweden, in 1660, although the bank ran out of coins to redeem its notes in 1664 and ceased operating in that year. It was 1694 when the Bank of England issued the first permanently circulating banknotes. The use of fixed denominations and printed banknotes came into use in the 18th century.
Most banknotes are made of heavy paper, sometimes mixed with linen, cotton, or other textile fibres. Some countries including Mexico and Australia produce polymer banknotes made from plastic, in order to improve wear and tear, and permit the inclusion of a small transparent window a few millimetres in size as a security feature that is very difficult to reproduce using common counterfeiting techniques.
See also For information about banknotes of particular countries or of the European Union:
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