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.

RELATED TERMS
  1. AUD

    AUD is an abbreviation for the Australian dollar, also known ...
  2. Federal Reserve Note

    A Federal Reserve Note is the physical bills that are held in ...
  3. MOP

    MOP is the International Organization for Standardization (ISO) ...
  4. KRW

    The currency abbreviation or currency symbol for the Korean won ...
  5. Fiat Money

    Fiat money is currency considered legal tender, but it lacks ...
  6. ARP (Argentinian peso)

    The currency abbreviation, or currency symbol, for the Argentinian ...
Related Articles
  1. Investing

    5 Tales Of Out-Of-Control Inflation

    Hyperinflation can make a $1,000 bill look like chump change.
  2. Tech

    The History Of Money: From Barter To Banknotes

    Money has been a part of human history for at least 3,000 years. Learn how it evolved.
  3. Insights

    How Currency Works

    Currency offers key advantages over economies based on direct trade, including a broader market for sellers' goods and services and transport ease.
  4. Investing

    How gold affects currencies

    There is a strong correlation between gold's value and the strength of currencies trading on foreign exchanges.
  5. Managing Wealth

    The Most Counterfeit-Proof Currencies

    The IACA awards provide some of the best insight into the currencies that are proving the most difficult to fake.
  6. Tech

    A Brief History of Cryptocurrency

    A brief history of cryptocurrency and some insight into how it works, why it has value, and whether it's a bubble or here to stay.
  7. Trading

    How the U.S. Dollar Became the World's Reserve Currency

    The U.S. dollar was first minted in 1914. Find out what occurred during the last century to make the U.S. dollar the world's reserve currency.
RELATED FAQS
  1. Is fiat money more prone to inflation than commodity money?

    Learn more about commodity and fiat money and some of the differences between them. Find out when the U.S. abolished the ... Read Answer >>
  2. What is the difference between fiat money and representative money?

    Learn the main differences between fiat money and representative money. Differences include actual physical currency and ... Read Answer >>
Trading Center