What Is Paper Money?

Paper money is a country's official, paper currency that is circulated for transaction-related purposes of goods and services. The printing of paper money is typically regulated by a country's central bank or treasury in order to keep the flow of funds in line with monetary policy.

Paper money tends to be updated with new versions that contain security features that seek to make it more difficult for counterfeiters to create illegal copies.

Understanding Paper Money

The first recorded use of paper money was believed to be in China during the 7th century A.D. as a means of reducing the need to carry heavy and cumbersome strings of metallic coins to conduct transactions. Similar to making a deposit at a modern bank, individuals would transfer their coins to a trustworthy party and then receive a note denoting how much money they had deposited. The note could then be redeemed for currency at a later date.

Example of Paper Money

In the U.S., paper money is considered fiat money in that it has no actual money, it's just an accepted medium of exchange. However, before 1971, this was not the case as U.S. banknotes were backed by a certain amount of gold as dictated by the Federal Reserve.

The US dollar is one of the most stable currencies in the world and benefits more than just Americans.

U.S. paper notes are the official currency in a number of countries and areas outside the U.S. The widespread use of the U.S. dollar translates to more than 350 million people around the world using the dollar as their main currency—and more than $17 trillion of economic activity. The non-US countries whose official currency is the dollar are Ecuador, El Salvador, Zimbabwe, Timor-Leste, Micronesia, Palau, and the Marshall Islands. The dollar is also used in all US territories, such as Puerto Rico and Guam, and a couple of British territories in the Caribbean: Turks and Caicos and the British Virgin Islands.

In addition, plenty of countries that regularly use the US dollar alongside their own local currency, including Bahamas, Barbados, St. Kitts and Nevis, Belize, Costa Rica, Nicaragua, Panama, Myanmar, Cambodia, and Liberia, as well as several Caribbean territories.

The euro is another currency used in multiple countries. As of 2018, 19 of the 28 member states in the European Union (EU) use the euro as its official currency.

Special Considerations

While paper money it is the most accepted medium of exchange, companies often issue stock in their own company to purchase other companies and to reward its staff, which is the next-closest thing to paper money as these shares can be exchanged on the open market for cash.

Key Takeaways

  • Paper money is a country's official, paper currency that is circulated for transaction-related purposes of goods and services.
  • The printing of paper money is typically regulated by a country's central bank or treasury in order to keep the flow of funds in line with monetary policy.
  • Paper money tends to be updated with new versions that contain security features that seek to make it more difficult for counterfeiters to create illegal copies.