Banknote – definition and meaning

A banknote means paper money. For example, a $20 bill is a banknote, a ₤20 note is a banknote. A banknote is often called just a note (UK/Ireland) or a bill (North America).

Central banks, such as the US Federal Reserve System, the Bank of England, or the European Central Bank, issue banknotes. The Bank of England says it has been issuing banknotes for more than 300 years.

According to the US Treasury, American banknotes are available in bills of $1, $2, $5, $10, $20, $50 and $100. The Bank of England says it issues four different denominations in the UK – ₤5, ₤10, ₤20 and ₤50.

Banknotes
Banknotes are used by consumers, retailers and most other businesses in every country in the world.

The Board of Governors of the US Federal Reserve System (Fed) has a wide range of responsibilities related to American banknotes, from making sure supplies are adequate to protecting and maintaining confidence in the US dollar.

The Federal Reserve System says on its website:

“The 12 regional Federal Reserve Banks, through their network of Districts and branches throughout the country, distribute Federal Reserve notes to the public through depository institutions. Reserve Banks process notes on high-speed sorting machines that check to ensure that they are genuine and fit for recirculation.”



 

According to Oxford Dictionaries, a banknote is:

“A piece of paper money, constituting a central bank’s promissory note to pay a stated sum to the bearer on demand.”

For hundreds of years banknotes have been made of paper. Since the turn of the millennium, several central banks have been switching to printing on polymer, a flexible and thin plastic film that resists washing machine cycles and have a longer life.

The first banknotes

Financial historians believe paper money first appeared during the Tang Dynasty China in the 7th century. However, it was not until the Song Dynasty in the 11th century that true paper money started to emerge in a big way.

The usage of banknotes later spread throughout the Mongol Empire. In the 13th century, European explorers including Marco Polo and William of Rubruck brought back the concept of paper money from the Far East.

In the early 1800s, Napoleon issued paper banknotes. Paper money originated in two forms: ‘bills’ which were issued with a promise to convert at a specified date, and ‘drafts’, which are receipts for a value held on account.

Early paper money
Early paper money (Exchange Bills), Northern Song Dynasty Issue, Jiao Zi, 950-1127. (Image: numismondo.net)

The predecessor to what we know today as regular banknotes emerged in medieval Italy and Flanders. Because of the dangers and physical impracticality of transporting huge sums of cash over long distances, money traders began to issue promissory notes. Initially these were personally registered, and later became a written order to pay a specified quantity to those who had it in their possession.

Soon after the Bank of England was established in 1694, it started to issue notes in return for deposits. The notes promised to pay the bearer a sum on the note on demand. These notes could be redeemed at the Bank of England for gold or coinage by anybody who presented them for payment.

Initially, these notes were handwritten on the Bank’s paper and signed by a cashier. After 1696, it was decided that the minimum value of a banknote in England would be £50. As the average person’s annual income at the time was less than £20, the vast majority of the population never came into contact with banknotes.

There was a gradual move during the 18th century toward fixed denomination banknotes. Eventually, some of the text started being printed, until 1853 when the first fully-printed notes appeared.

The Bank of England opted to keep the name of the Chief Cashier as the payee on banknotes. This practice has remained unchanged in the UK. In the US, bills are signed by the Secretary to the Treasury and the Treasurer of the United States.

Many banknotes are fake

According to studies, 100 in every 1,000,000 US dollars are counterfeit banknotes; 50 in every 1,000,000 euros, 300 in every 1,000,000 pounds sterling, and 10 in every 1,000,000 Swiss francs.

The US Federal Reserve says the best way to check a banknote is to examine its security features, such as the security thread and watermark. It adds that detection pens are not 100% accurate and may give false results.

Traders and consumers should know what the security features of their banknotes are. If they end up with a fake note they will lose that money. It is illegal to pass on counterfeit currency.

The Federal Reserve says on its website:

“If you live in the United States and you think you’ve received a counterfeit note, immediately notify the local police. Try to remember the physical characteristics of the person who passed the suspect counterfeit, and if possible write down the person’s license plate number and vehicle description. Store the suspect counterfeit apart from genuine currency and release it as soon as possible to law enforcement authorities.”

Most fake banknotes are discovered by the banking system during the sorting process for re-circulation. Some are removed by retailers and members of the general public who either hand them into banks or the police, while another significant quantity is removed when the police carry out raids.

In most advanced economies, counterfeits are removed from circulation rapidly, usually after just one single use.

The Bank of England says that about 430,000 counterfeit banknotes were taken out of circulation in 2014 in the UK, with a face value of £8.1 million. The central bank added “This is just a tiny proportion of the genuine banknotes in circulation; an average over 3 billion with a face value exceeding £61 billion.”

Video – the life of a banknote

This Bank of Canada video explains how banknotes are made.