A banknote, also referred to as a bill paper money or a note, is a promissory note created by a bank which is payable to the bearer on demand. It is a form of negotiable instrument, made use of as money, and as a legal tender in several jurisdictions. Banknotes and coins form the cash or bearer types of modern money. Banknotes are generally reserved for higher values while coins are used as monetary units of lower value.
In the early days, metallic coins were in vogue for negotiating and settling trades. Banknotes came as an alternative form of money offering certain advantages over coins. Some of the advantages are:
• Since banknotes are of polymer or printed paper, they generally have a low issuing cost in comparison to coins which are created through industrial manufacturing techniques.
• Coins lose economic value through years of usage and are eventually scrapped. Banknotes’ economic value remains intact by wear. Banknotes are taken as legally valid claims on the bank that has issued these, even if the banknotes are in bad shape. The issuing bank however has to pay for the replacement cost of the banknotes that are in bad condition.
• Banknotes possess economic value, and are a type of financial capital or a kind of loan to the bank issuing them. Banknotes earn interest indirectly by investments done through the issuing bank. However, coins are a type of non–financial capital and they do not pay interest.
• Banknotes are lighter than coins of equivalent value and may be issued in big denominations. This brings down the cost for transportation of banknotes as compared to coins.
However counterfeiting of banknotes is easier in comparison to forging coins. Banknotes also have acceptance costs like the coins. Each form of money is used in situations where the advantages weigh more than the comparative disadvantages.
History of banknotes
Paper money had its origin in two forms. These were drafts which were taken as receipts for value that was held on account, and the bills that had been issued along with a commitment for conversion at a subsequent date. Growth of money happened on the basis of agricultural capital and the privileged place occupied by precious metals. The use of banknotes as money developed over time.
Banknotes originated in ancient China as "jiaozi". In the United States of America, the Massachusetts Bay Colony in the period during early 1690s was the earliest of the Thirteen Colonies to issue permanently circulated banknotes. Fixed denominations usage and printed banknotes came to be popular during the 18th century.
Who issues banknotes?
Usually, a central bank or treasury is responsible for issuing banknotes. Historically though, various banks and institutions have been found to have issued banknotes. In U.S.A, commercial banks issued banknotes from the period 1863 to 1935. Nowadays, Federal Reserve Notes or U.S paper currencies are issued by Federal Reserve Banks in U.S.A
Collecting banknotes from around the world has become an exciting hobby for millions and there are a lot of websites which show the techniques of how to go about it.