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, and in many jurisdictions is legal tender. Along with coins, banknotes make up the cash or bearer forms of all modern fiat money. With the exception of non-circulating high-value or precious metal commemorative issues, coins are used for lower valued monetary units, while banknotes are used for higher values.
Advantages and Disadvantages
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 costs of using bearer money include:
- 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 lower cost of issue, especially in larger denominations, compared to coin of the same value.
- Wear costs. Banknotes do not 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.
- 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.
- 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.
- Security. Counterfeiting paper notes is easier than forging coins, especially true given the proliferation of color photocopiers and computer image scanners. Numerous banks and nations have incorporated many types of countermeasures in order to keep the money secure.
The different advantages and 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.
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.
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.
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”.