A banknote, often known as a bill, paper money, or note, is a negotiable instrument, a promissory note created by a bank payed to the bearer on demand, which is used as money, and often a legal tender. Along with coins, banknotes make up the cash of all modern fiat money. Banknotes are usually the higher values of a currency, with the only exceptions being non-circulating high-value or precious metal commemorative coin issues.
The banknote was first developed and used by the Tang and Song dynasties during the 7th century. Its roots were in Tang merchants, who did not desire to carry the heavy bulk of the copper coinage in large commercial transactions. During the reign of the Yuan Dynasty, banknotes were adopted by the Mongol Empire. In Europe, the idea of banknotes was first introduced in the 14th century, but had a proper introduction in the 17th century.
Advantages and disadvantages
Originally coins were composed of precious and semi-precious metals and used to negotiate and settle trades, due to the value of the metals. Banknotes offer a different bearer form of money, but the advantages and disadvantages between banknotes and coins are complex, so in different circumstances, the overall advantage could lie with either form.
Costs of using bearer money include:
- Manufacturing or issuing costs:
- Coins are produced through industrial manufacturing methods, which process the precious or semi-precious metals, and will require additions of alloy for hardness and wear resistance.
- Banknotes are printed on paper or polymer, and generally have a lower cost for issuing, especially with larger denominations, compared to the cost of the coin of the same value.
- Wear costs:
- Banknotes will not lose their economic value due to wear, because, even though they are in poor condition, they are still a legally valid claim on the bank that issues them. However, these banks do have to pay the cost of replacing the banknotes in poor condition, and paper notes wear out much faster than the corresponding coins.
- Coins may be expensive to transport for transactions of very high values, but banknotes can be issued in larger denominations lighter than the equivalent value of coins.
- Coins can easily be checked for authenticity by checking the weight, and examining and testing the coin. This may be costly, but high quality design and manufacturing can help lower these costs.
- Banknotes have an acceptability cost, by checking the banknote's security features and confirming acceptability to the issuing bank.
The different advantages and disadvantages among coins and banknotes implies that there may be a permanent role for both forms of money, each being used where its advantages outweigh its disadvantages.
Paper currency was first developed in China during the Tang Dynasty in the 7th century, and was later introduced to the Mongol Empire, Europe, and America. It was originally developed into two forms: drafts, which are receipts for value held on account, and "bills", which were promised to be converted at a later date.
The understanding of banknotes as money has changed over time. Originally, money was based on precious metals, such as gold, platinum, or silver. Because of this, banknotes were often seen as essentially an IOU or promissory note, a promise to pay someone in precious metals on presentation. With the rapid removal of precious metals in monetary systems, banknotes eventually evolved to represent credit money, or if backed by the credit of the nation's government, fiat money.
Notes or bills were sometimes referred to in 18th century novels and were sometimes a key part of the plot such as "a note drawn by Lord X £100 which becomes due in 3 months' time".
Money before the banknote
Money is based on the coming to importance of some commodity as payment. The first monetary basis was based on agriculture, with cattle and grain. During Ancient Mesopotamian times, drafts were given against stored grain as a unit of account. A Greek drachma was the equivalent to a weight of grain. The Japanese feudal system was based on the number of rice per year, measured in koku.
Simultaneously, legal codes enforced payment for injury in a standardized form, usually given in precious metals. The development of currency then comes from the agricultural basis and precious metals having a privileged place in economy.
The banknote was originally developed in China during the reign of the Tang Dynasty in the 7th century, with local issues of paper currency. Its roots were in merchant receipts of deposit during the time, as these individuals did not desire the heavy weight of the copper coins in large commercial transactions.
Before the use of paper in ancient China, the coins used were circular and had a square-shaped hole cut into the center, thus, several of these coins could be strung together on a rope. Chinese merchants, if they managed to become rich enough, found that their strings of coins were hard to carry around easily, as they were heavy. As a resolution to this problem, coins were often left with a trustworthy person, and the merchant was given a slip of paper designating how much money they left with that person. If the merchants revealed their slips to the trustworthy person, they could regain their money. Eventually, the first paper money, "jiaozi" originated from these promissory notes.
During the 7th century, China was having local issues with paper currency, and by 960, the Song Dynasty, which was short of copper for striking coins, issued the first generally circulating paper notes. A note is a promise for redemption later for an object of value, usually a specie. The issue of credit notes is often only effective for a limited time, and at some discount to the designated amount later. The jiaozi, however, did not replace coins during the reign of the Song Dynasty, as the paper money was used alongside the coins.
The central government soon noticed the economic advantages of the printing of paper money, and issued a monopoly right of several of the deposit shops to the issuing of these certificates of deposit. By the beginning of the 12th century, the amount of banknotes issued during only one year equalled an annual rate of 26 million strings of cash coins. By the 1120s, the central government officially stepped in and produced their own paper money using woodblock printing.
Even before this, the government of the Song Dynasty was printed large amounts of paper tribute. It was recorded that each year before 1101, the prefecture of Xinan (modern day Xi-xian, Anhui), would send 1,500,000 sheets of paper in seven variations to the capital at Keifeng. In that same year, Emperor Huizong decided to decrease the amount of paper taken in the tribute quota, because it caused damaging effects and heavy burdens on the people of his region. However, the government still required paper for the exchange certificates and the state's new issue of paper money. For printing the paper money alone, the Song government started several factories in the cities of Huizhou, Chengdu, Hangzhou, and Anqi.
The amount of people employed in these paper money factories was quite large, being recorded in 1175 that the factory in Hangzhou employed at least 1000 workers daily. However, the issues of paper currency issued by the government were not yet nationwide standards, so issues were limited to regional zones of the empire, and were only valid for use in a given and temporary limit of a 3-years time.
The Song Dynasty managed to change the geographic limitation of the currency between 1265 and 1274 by producing a nationwide standard currency paper money, once its circulation was backed with gold or silver. The range of varying values of these banknotes was perhaps from one string of coins to one-hundred at the most. Ever since the year 1107, the government printed banknotes with a minimum of six ink colors, with intricate designs and sometimes with a mixture of unique fiber in the paper to prevent counterfeit.
The Yuan Dynasty was the first Chinese dynasty to use paper money as the predominant circulating medium. The founder of this dynasty, Kublai Khan issued the Chao to be used during his reign. The original notes developed during the Yuan Dynasty were restricted in their native area and duration as in the precedent Song Dynasty, but during its later years, the Yuan Dynasty faced massive shortages of specie used to fund their ruling in China, and began printing paper money with no restrictions on time. By the year 1455, in an effort to slow economic expansion and end hyperinflation, the succeeding Ming Dynasty ended the production of paper money, and closed much of the original Chinese trade.
The merchants from the Republic of Venice were impressed by the fact that Chinese paper money was guaranteed by the State and not the private merchant or banker as they did further west.
The term "banknote" comes from the notes of the bank ("nota di banco"), and dates to about the 14th century, originally recognizing the holder of the note to at some point collect precious metal deposited with a banker, or a representative of paper currency. By the 14th century, they were used in every area of Europe, an Italian city-state merchant colonies outside of Europe. For international payments used more often was the most efficient and sophisticated bill of exchange ("lettera di cambio"), a promissory note based on a virtual currency account (usually a coin that no longer physically existed). All physical currency was physically related to this virtual currency, which also served as credit.
During the medieval times in Italy and Flanders, the insecurity and impractibility of transporting large amounts of money over long distance caused traders to start using promissory notes. In the beginning, these notes were personally registered, but they later became written orders to pay the amount to whoever had the note in their possession. These notes are seen as predecessors of regular bank notes.
The first proper European banknotes were issued by the Stockholms Banco, a predecessor of Sveriges Riksbank (Bank of Sweden), in 1660, though the bank ran out of coins to redeem its notes in 1664, and ceased operating them that year.
Until Louis XIV, banknotes were issued only by small creditors, had very limited circulation, and were not backed by the authority of the state. John Law helped in the process of establishing banknotes as a formal currency, backed by capital consisting of French government bills and notes accepted by the government.
During 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 followed this example in the 18th century.
During the early 18th century, each of the original thirteen colonies issued their own banknotes. During the American Revolutionary War, however, the Continental Congress issued Continental currency to help finance the war, nearly eliminating the need for 13 different currencies. The federal government of the United States did not print banknotes until the year 1862. However, almost immediately after the United States Constitution was adopted in 1789, the United States Congress chartered the First Bank of the United States and authorized it to issue banknotes. It served as the seemingly central bank of the United States until 1811 when the bank was close, due to Congress' failure to renew its charter. During 1816, Congress chartered the Second Bank of the United States. Its charter expired in 1836, but proceeded with operations under a charter granted by the Commonwealth of Pennsylvania until 1841.
During 1933, public acceptance of banknotes in replacement of precious metals in the United States was hastened partially due to Executive Order 6102. This order carried a threat of a $10,000 fine and a maximum of ten years in prison if anybody kept more than $100 of gold in preference to banknotes.
Issuing of banknotes
Usually, a central bank or treasury is the only responsible body within a state or currency union for issuing banknotes. However, this is not the case all the time, and historically, paper currency of countries was handled solely by private banks. Thus, numerous different banks or institutions may have issued paper currency in a designated country. In the United States from 1863 to 1935, commercial banks were authorized to issue banknotes. In the last of these series, the bank that issued the currency would stamp its name and promise to pay, as well as the signatures of its president and cashier on a preprinted note. By this time, notes were already standardized in appearance and were not very different from the Federal Reserve Notes that circulated for most of the 20th century.
Private banknote issue continues to this day, but only in a handful of countries. For example, by virtue of the constitutional complex setup of the United Kingdom, some commercial banks in two of the UK's four constituent countries (Scotland and Northern Ireland) continue printing their own banknotes for circulation, though they are not fiat money or legally declared as legal tender anywhere. The central bank of the nation, the Bank of England, prints notes that are legal tender if used in England and Wales. These notes are usable as currency in the rest of the United Kingdom, but are not used as legal tender (see Banknotes of the pound sterling).
In Hong Kong, there are three commercial banks that are licensed to issue Hong Kong dollar banknotes. Along with commercial issuers, other organizations may be granted note-issuing powers. For example, the Singapore dollar was issued by the Board of Commissioners of Currency Singapore, a government agency that was later taken over by the Monetary Authority of Singapore, until 2002.
Most of the banknotes printed throughout the world are composed of cotton paper with a weight of 80 to 90 grams per square meter. This cotton is often mixed with linen, abacá, or other textile fibers. Usually, the paper used for banknotes is different than ordinary paper, being much more resilient, resists wear and tear (a banknote's average life is 2 years), and also does not contain usual agents that make ordinary paper glow slightly under ultraviolet light. Unlike most printing or writing paper, paper used in banknotes is usually infused with polyvinyl alcohol or gelatin to provide extra strength. Banknotes printed in Early China were printed on paper composed of Mulberry bark, and this fiber still remains in use with the Japanese banknote paper.
Counterfeiting and security measures
The easiness in which paper money can be created, legally or by counterfeiters, has led both groups to temptation in times of crisis including war or revolution to produce banknotes not supported by precious metal or other goods, leading to hyperinflation and a loss of faith in the actual value of paper money, e.g. Continental currency printed by the Continental Congress during the American Revolution, the Assignats produced by France during the French Revolution, the dollars produced by the Confederate States of America and the individual states of this confederacy, the financing of World War I by the Central Powers (by the year 1922 1 gold Austro-Hungarian krone of 1914 was worth 14,400 paper Kronen), the devaluation of the Yugoslav dinar in 1999, etc. Banknotes can also be overprinted to show political changes that occur faster than new currency can be printed.
Most banknotes are created using the mold made process by which a watermark and thread is added during the paper forming process. This thread is a simple-looking security component that is found in most banknotes. It is, however, usually complex in construction, using fluorescent, magnetic, and micro print elements. By combining it with watermarking technology, the thread can be made to the surface periodically on only one side. This process is known as "windowed thread", and increases counterfeit resistance of banknote paper. It was invented by Portals, a part of the UK De La Rue group. Other methods related to this are water marking to reduce the number of corner folds by strengthening the part of the note, coatings to reduce dirt from gathering up on the note, and plastic windows in the paper to make it very hard to counterfeit.
During 1988, Austria produced its 5000 shilling banknote, which is the first addition of foil (Kinegram) to a paper banknote in the history of the printing of paper currency. The application of optical features such as foil is now commonly used throughout the world.
Many banknotes currently contain embedded holograms.
- For more information, see Polymer banknotes
During 1983, Costa Rica and Haiti issued the first Tyvek and the Isle of Man issued the first Bradvek polymer banknotes, printed by the American Banknote Company and developed by DuPont. In 1988, after research and development by the Commonwealth Scientific and Industrial Research Organization (CSIRO) and the Reserve Bank of Australia, Australia printed the world's first polymer banknote made from biaxially-oriented polypropylene, and in 1996 became the first country to have a complete set of circulating polymer banknotes in all denominations. Since then, other countries began to circulate polymer banknotes, including: Bangladesh, Brazil, Brunei, Chile, Guatemala, the Dominican Republic, Indonesia, Israel, Malaysia, Mexico, Nepal, New Zealand, Papua New Guinea, Romania, Samoa, Singapore, the Solomon Islands, Sri Lanka, Thailand, Vietnam, and Zambia, with other countries issuing commemorative notes composed of polymer, including China, Kuwait, the Northern Bank in Northern Ireland, Taiwan, and Hong Kong. Other countries state that sometime in the future, they plan on issuing polymer banknotes, such as Nigeria and Canada. In 2005, Bulgaria issue the first hybrid paper-polymer banknote.
Banknotes composed of polymer were created to improve durability and prevent counterfeiting using incorporated security features, such as optically variable devices that are extremely difficult to reproduce and transparent windows.
Silk and other fibers have been used commonly in the manufacturing of a number of banknote papers, intended to create additional durability and security. Crane and Company patented banknote paper containing silk threads in 1844, and still supplies paper to the United States Treasury since its cooperation starting in 1879. Banknotes printed on pure silk include "emergency money" Notgeld issues from several German towns in 1923 due to fiscal crisis and hyperinflation. Most notably, Bielefeld produced several silk, leather, velvet, linen, and wood issues, and although these were produced mainly for collectors rather than for circulation, they are currently in demand by notaphilists. Banknotes printed in cloth include numerous Communist Revolutionary issues in China from areas such as Xinjiang in the United Islamic Republic of East Turkestan in 1933. Emergency money was also printed during 1902 on khaki shirt fabric during the Second Boer War.
Banknotes or coins composed of leather were issued during a number of sieges, as well as in other times of emergency. During Russia's administration of Alaska, banknotes were printed on sealskin. Several 19th century issues are known in Germanic and Baltic states, including the towns of Dorpat, Pernau, Reval, and Woisek. In addition to issues from Bielefeld, other German Notgeld composed of leather is known from Borna, Osterwieck, Paderborn, and Pößneck.
Other issues of banknotes were printed on wood, which was formerly used in Canada during Pontiac's Rebellion and by the Hudson's Bay Company. In 1848, Bohemians used wooden checkerboard pieces as money.
Vending machines and banknotes
Humans are not solely acting on the acceptance of banknotes. During the late 20th century, vending machines were designed to notice banknotes of smaller values long after they were designed to recognize coins from slugs. This capability has become hard to escape in economies where inflation was not followed by the introduction of progressively larger coin denominations (such as the United States, where there have been several attempts to introduce dollar coins to general circulation, but have ultimately failed). The preexisting infrastructure of these machines presents a difficulty in changing design of banknotes to make them less counterfeitable, that is, by adding new features very easily discernible by people that they would immediately reject banknotes of an inferior quality, for every machine in the country would have to be updated.
Banknotes only have a limited time of circulation, after which they are collected to be destroyed, usually by recycling or shredding them. A banknote is removed from a bank's money supply or other financial institutions due to everyday wear and tear due to its handling. Bundles of banknotes are passed through a sorting machine that determines what particular notes need to be shredded, or are removed from a supply chain by a human inspector if they are decided unfit for use, two common causes being mutilation or tearing. Counterfeit banknotes are destroyed as well, unless needed for evidentiary or forensic purposes.
Contaminated banknotes are also destroyed. A report by the Canadian government indicates:
- Types of contaminants include: notes found on a dead organism, usually a human, stagnant water, contamination by human or animal body fluids, such as urine, feces, vomit, infectious blood, sexual fluids, fine hazardous powders from detonated explosives, dye pack, and/or drugs...
These banknotes are removed from circulation mainly to prevent the spread of disease.
When taken out of circulation, Australian banknotes are melted down and mixed together to be transformed into plastic garbage bins. The United States federal government will occasionally sell the shreds of money, known by the nickname "Fed Shreds" to the people.
In most cases, destruction of banknotes is illegal, unless done by the nation's federal government.
- For more information, see Money burning
The destruction of paper currency is also done using a flame to burn a banknote. These are not usually burned to destroy old or worn currency, but for symbolic purposes, artistic effects, protests, or signals. In most jurasdictions, burning banknotes is illegal, but in some cases, the government of a country may burn currency to dispose of it.
Oftentimes, people will burn imitation or counterfeit money as a part of symbolism or tradition. During the early 18th century, courts in New York City would publicly burn counterfeit money they had gathered to show the people that counterfeiting was both a dangerous and worthless act. In traditional Chinese ancestor veneration, joss paper imitating money is ceremonially burned, with the belief that the deceased may use the burnt offerings to finance a more comfortable afterlife.
Banknote collecting, or notaphily, is a rapidly growing area of numismatics. Although it was not as widespread as coin and stamp collecting, this hobby is increasingly expanding. Before the 1990s, banknote collecting was relatively small in comparison to the related coin collecting, but the practice of currency auctions, along with larger public awareness of paper money has caused an increase in interest and value of rare banknotes.
Collectors will sometimes use books, such as Paper Money of the United States to find information about the banknotes they own or banknotes they may be interested in.
For several years, the way to collect banknotes was by a handful of mail orders that issue price lists and catalogs. During the early 1990s, it became more common for rare notes to be sold at coin and currency shows by auction. These illustrated catalogs and "event nature" of auction practice have seemed to cause a major rise in overall awareness of banknotes in the numismatic community. Complete, advanced collections are sometimes sold at one time, and even to today, single auctions can generate millions of dollars in gross sales. Today, eBay has surpassed auctions in terms of highest volume of sales of banknotes. However, rare banknotes still sell for much less in comparison to a rare coin. This inequality is diminishing as paper money prices begin to rise. Many rare notes from the United States have been sold for millions of dollars.
Several organizations and societies around the world exist for the hobby of banknote collecting, including the International Bank Note Society.
- ↑ Ebrey, Walthall, and Palais (2006), 156.
- ↑ 2.0 2.1 Bowman (2000), 105.
- ↑ 3.0 3.1 Gernet (1962), 80.
- ↑ Ebrey, Walthall, and Palais (2006), 156.
- ↑ 5.0 5.1 Ebrey et al., 156.
- ↑ 6.0 6.1 6.2 6.3 Gernet, 80.
- ↑ Needham, Volume 5, Part 1, 47.
- ↑ 8.0 8.1 8.2 Needham, Volume 5, Part 1, 48.
- ↑ De Geschiedenis van het Geld (the History of Money), 1992, Teleac, page 96
- ↑ http://www2.timesdispatch.com/news/2011/mar/09/TDWEAT01-today-in-history-march-9-ar-892229/
- ↑ 11.0 11.1 Bank for International Settlements. "The Role of Central Bank Money in Payment Systems" (PDF). pp. 96, and see also page 9: "The coexistence of central and commercial bank monies: multiple issuers, one currency". http://www.bis.org/publ/cpss55.pdf. Retrieved 2008-08-14. "Although historically not the case, these days banknotes are usually issued only by the central bank. This is broadly the case in all CPSS economies, except Hong Kong SAR, where banknotes are issued by three commercial banks. Singapore and the United Kingdom are more limited exceptions. Singapore dollar banknotes have been issued by the Board of Currency Commissioners, a government agency, although following the merger of the Board into the MAS in October 2002 this is no longer the case. In the United Kingdom, Scottish banks retain the right to issue banknotes alongside those of the Bank of England and three banks currently still do so."
- ↑ "DeLaRue - The Banknote Lifecycle – from Design to Destruction"
- ↑ Trichur, Rita (2007-09-28). "Bankers wipe out dirty money". Toronto Star. http://www.thestar.com/Business/article/261441. Retrieved 2007-09-28.
- Banknote on the English Wikipedia
- 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