What is Banknote?
The term “banknote” refers to the negotiable promissory note that is issued by the central bank. It is used as a legal tender such that one can use it to pay others a specific amount of money. These legal tenders are also popularly known as bills or simply notes. The figure mentioned on the face of the banknote is the amount payable on demand to the bearer without any interest.
In the early days, precious metals, such as gold or silver, were usually used to pay for goods and services. However, the world eventually gave away the usage of such physical assets as they shifted to the use of paper money and coins over a period of time. Countries started to issue their own banknotes that could be used as a mean to exchange objects of value. Today, banknotes coupled with coins make up the cash supply in any economy.
History of Banknote
Paper currency, in the form of receipts, was first introduced in China during the reign of the Tang dynasty in the 7thcentury. However, true paper money called “jiaozi” was first used in the 11th century during the reign of the Song dynasty. Later, the use of paper currency spread throughout the Yuan dynasty or the Mongol Empire.In the 13th century, the concept of paper currency was introduced in Europe by European explorers, such as William of Rubruck and Marco Polo. By the 14th century, paper currency was eventually adopted in every part of Europe.
In 1695, the Bank of England was the first bank to introduce a permanent issue of banknotes, while in the United States the federal government started to print banknotes only by 1862. Initially, the banknotes were simply issued by the banks on the basis of precious metals, such as gold or silver. However, the backing of banknotes by precious metals has become obsolete as the paper currency has evolved over time to become pure fiat money.
How does Banknote Work?
The central bank of a country can only print banknotes. For instance, the Federal Reserve Bank is the only issuing bank in the US. Today, paper currency is a pure fiat currency as it is not linked to any physical asset, such as the gold standard. In other words, the paper currency today is valued purely on the basis of the relationship between demand and supply, and not on the basis of the currency’s physical material. As such, central banks can print banknotes based on the demand-supply dynamics coupled with various other economic factors, such as inflation.
Example of Banknote
Let us now look at the example of some of the banknotes issued in some of the different economies. In this example, we have mentioned the description of the symbols found on both sides of the currency.
|United Kingdom||GBP 5||Queen Elizabeth II||Elizabeth Fry|
|GBP 10||Queen Elizabeth II||Charles Darwin|
|GBP 20||Queen Elizabeth II||Adam Smith|
|GBP 50||Queen Elizabeth II||James Watt and Matthew Boulton|
|United States of America||USD 1||George Washington||Great Seal of the United States|
|USD 2||Thomas Jefferson||Declaration of Independence|
|USD 5||Abraham Lincoln||Lincoln Memorial|
|USD 10||Alexander Hamilton||Treasury Building|
|USD 20||Andrew Jackson||White House|
|USD 50||Ulysses S. Grant||Capitol|
|USD 100||Benjamin Franklin||Independence Hall|
|Switzerland||CHF 10||Le Corbusier||Le Corbusier’s buildings in Chandigarh|
|CHF 20||Arthur Honegger||Elements from Honegger’s Pacific 231|
|CHF 50||Sophie Taeuber-Arp||Taeuber-Arp’s Dada Head|
|CHF 100||Alberto Giacometti||Giacometti’s Man Walking|
|CHF 200||Charles Ferdinand Ramuz||Swiss mountains and Lavaux area|
|CHF 1000||Jacob Burckhardt||Detail from the Palazzo Strozzi|
|Eurozone||EUR 5||Classical gateway||Classical bridge|
|EUR 10||Romanesque gateway||Romanesque bridge|
|EUR 20||Gothic windows||Gothic bridge|
|EUR 50||Renaissance windows||Renaissance bridge|
|EUR 100||Baroque/Rococo gateway||Baroque/Rococo bridge|
|EUR 200||Art Nouveau windows||Art Nouveau bridge|
|EUR 500||Modern windows||Modern bridge|
|China||CNY 1||Mao Zedong||Three Pools Mirroring the Moon at West Lake|
|CNY 5||Mao Zedong||Mount Tai|
|CNY 10||Mao Zedong||Three Gorges of the Yangtze River|
|CNY 20||Mao Zedong||Scenery of Guilin|
|CNY 50||Mao Zedong||Potala Palace|
|CNY 100||Mao Zedong||Great Hall of the People|
Uses of Banknote
The banknote is used for the following purpose:
- It is used as the legal tender
- It is widely used as a medium of exchange
- It can be used as a store of value
Advantages of Banknote
Some of the major advantages of the banknote are as follows:
- It facilitates ease of transaction as there is no confusion regarding the value of the currency, given that it clearly appears on the face of it.
- A banknote is the common and acceptable medium of offline transaction across the globe.
- It is easier to store value in the form of paper currency than in the form of other physical assets. For instance, price of 1kg of gold stored in banknotes will be much lighter than the actual asset.
Disadvantages of Banknote
Some of the major disadvantages of the banknote are as follows:
- Given that banknotes are made of paper, they are not resilient enough and can be soiled or torn, which may result in a total loss of value.
- Holders of banknotes are always exposed to the risk of counterfeit currency, which is an exact replica of the original currency but without legal sanction. Counterfeit currency holds zero value and is considered illegal.
So, it can be seen that banknotes are pieces of paper issued by the central banks and they represent the legal tender of the economy. They are a type of promissory notes and the bearer of these notes is payable the amount mentioned on the face of it on-demand without any interest. Although it offers ease of transaction and acts as the medium of exchange, the risk of counterfeit currency remains one of the major concerns.
This is a guide to Banknote. Here we also discuss the introduction and how does banknote work along with advantages and disadvantages. You may also have a look at the following articles to learn more –