What is a 'Banknote'

A banknote is a negotiable promissory note, which a bank can issue. A banknote is payable to the bearer on demand, and the amount payable is apparent on the face of the note. Banknotes are considered legal tender; along with coins, they make up the bearer forms of all modern money.

A banknote is known as a "bill" or a "note."

BREAKING DOWN 'Banknote'

Originally, people used objects, such as gold and silver, to pay for goods and services. Eventually, paper money and coins replaced these physical assets. Precious metals backed the new currencies.

At present only the government backs banknotes. Although in earlier times commercial banks could issue banknotes, the Federal Reserve Bank is now the only bank in the United States that can create banknotes. Worldwide, billions of financial transactions use banknotes every day.

Historically, it was possible for U.S. citizens to exchange U.S. government-issued paper money for gold or silver. This bimetallic standard system consisted of paper currency in a fixed ratio with gold and/or silver. However, in 1964, the U.S. government gradually began to halt the bimetallic standard; in 1971, the U.S. went off the gold standard altogether. The decision created a purely fiat currency, which the government supported only with its good faith in its ability to pay off any debts.

Fiat money derives its value from the relationship between supply and demand, not the value of the currency’s physical material. Since fiat money is not linked to physical reserves, it risks becoming worthless, due to hyperinflation (e.g. If U.S. citizens lose faith in the U.S. dollar bill, this paper currency will no longer hold value.)

Many use the terms banknotes and currency notes interchangeably. While both are promissory notes, many use currency notes more frequently for common dealings.

Polymer Banknotes and the Bank of England

In 2013 the Bank of England considered introducing polymer banknotes. These plastic-like banknotes, which Canada and many other nations worldwide use, are easier to clean and harder to counterfeit. The pros of introducing polymer banknotes also include their enhanced security features, reduced replacement costs (as polymer lasts two and a half times longer than paper), waterproofing, dirt-resistance, and overall lower negative environmental impacts. Cons to introducing polymer banknotes into Britain’s monetary system included a higher upfront manufacturing cost, counting difficulties – given that the material is slipperier than paper — challenges in folding the new material, and questionable compatibility with existing vending machines and auto-payment systems.

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