Banknote

Banknote is a negotiable promissory note issued by a bank or monetary authority, payable to the bearer on demand. Paper money originated in China during the Tang dynasty (618-907 CE) as merchant receipts for copper coin deposits^[1]. Sweden produced Europe's first banknotes on July 16, 1661, through Stockholms Banco. The Bank of England, established in 1694, became the first institution to issue permanent banknotes that remain in circulation today.

Origins in China

Chinese merchants created the earliest paper currency out of practical necessity. Copper coins were heavy and inconvenient for large commercial transactions. Merchants began issuing receipts that could be exchanged for metal coins held on deposit. These "flying money" notes simplified trade considerably.

Government-issued centralized paper money appeared during the Song dynasty in the 11th century. Jiaozi became the world's first officially printed banknote, widely recognized by numismatists as the origin of paper currency^[2]. Marco Polo described Chinese paper money in his late 13th century travel journals, introducing the concept to European audiences.

Early Chinese experiments revealed inherent risks. Without backing by precious metals, paper money was subject to overissuance. Inflation followed. These lessons would be repeated throughout monetary history.

Swedish innovation

Sweden faced unique monetary challenges in the 17th century. As Europe's leading copper producer, the country had adopted copper plate money in 1644. Some plates weighed nearly 20 kilograms each. Transacting business with such currency proved extraordinarily impractical.

Johan Palmstruch established Stockholms Banco and received royal permission to issue kreditivsedlar - credit notes exchangeable for gold and silver coins. The historic first issue occurred on July 16, 1661. Europe's first banknotes entered circulation successfully^[3].

The experiment ended badly. Three years later, the bank collapsed after printing excessive quantities of paper money. The artificial expansion of money supply led to insolvency. Sveriges Riksbank eventually assumed the legacy operations and continues today as the world's oldest central bank.

Bank of England and permanent issuance

King William III chartered the Bank of England in 1694 to fund the Nine Years' War against France. The bank opened on August 1, 1694, at the Mercers' Hall in Cheapside, London. It issued its first banknotes that same year^[4].

Early Bank of England notes were handwritten for irregular amounts. Partial printing began in 1725, but cashiers still signed each note individually and made them payable to specific persons. Fully printed notes appeared in 1855. The Bank of Scotland, founded separately, began issuing notes in 1696 and remains the world's longest continuous banknote issuer.

Until 1928, Bank of England notes were "White Notes" - printed in black ink with blank reverse sides. Denominations ranged from £1 to £1000 over the centuries. The Chief Cashier has signed all notes since 1870, a tradition maintained to this day.

Security features evolution

Counterfeiting threats drove continuous security improvements. Henry Portal of Whitchurch, Hampshire won a contract in 1724 to supply high-quality paper for banknote printing. The 1855 redesign introduced a Britannia vignette that had appeared on notes since 1694.

The 20th century brought technological advances. Metal security threads were added in 1940. Watermarks became more sophisticated. Color printing replaced black-and-white designs. The EURion constellation, a pattern of yellow circles, now prevents photocopier reproduction.

Polymer banknotes represent the latest evolution. The Bank of England issued its first polymer £5 note featuring Sir Winston Churchill. This thin, flexible plastic material lasts longer, stays cleaner, and resists counterfeiting better than paper notes^[5].

Economic significance

Central banks use banknote issuance as a monetary policy tool. Over 4.7 billion Bank of England notes currently circulate, worth approximately £86 billion. Cash remains essential for certain transactions despite digital payment growth.

The ability to create money carries enormous responsibility. Historical examples demonstrate the consequences of overissuance. Hyperinflation in Weimar Germany, Zimbabwe, and Venezuela resulted from excessive banknote printing. Modern central banks maintain independence precisely to prevent such outcomes.

Seigniorage - the profit from issuing currency - represents revenue for monetary authorities. The difference between face value and production cost accrues to the issuer. This economic benefit accompanies the obligation to maintain currency stability.

References

• Bank of England (2024). History of Banknotes. Bank of England Museum.
• Davies, G. (2002). A History of Money: From Ancient Times to the Present Day. University of Wales Press.
• Britannica (2024). Bank note. Encyclopedia Britannica.
• Museum of Gothenburg. Europe's First Banknote.

Footnotes

1. Wikipedia. Paper Money - Origins in China.
2. Citeco. 10000 Years of Economy - The First Banknotes or Paper Money.
3. Museum of Gothenburg. Europe's First Banknote.
4. Bank of England. History.
5. Bank of England. The Evolution of Banknotes.