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A banknote is also known as a bill, paper money or fiat money. A banknote is a note issued by a government or bank, which is licensed by authorities and broadly accepted by market participants. Banknotes are called fiat money, as they are not backed by any commodity, as they used to be during the gold standard (L. R. Wray, 2012). Banknotes can be used to participate in market activities and exchange notes for goods and services as a method of payment. Different countries have their own banknotes that were issued and legally approved by the governments of those countries. Banknotes might have different values depending on the economy of the country. Each country has its own banknotes, and not all banknotes of one country are accepted as a method of payment in another country. Banknotes of one country can be exchanged for banknotes in another country using a currency exchange rate.

History of a banknote

Money has a huge and long story that would go back to ancient times when gold, silver and bronze coins were used as a method of payment. As society was progressing, the ways of payments were evolving. Italian merchants used to have books, which they used for accounting and to keep track of the debtors. Lately, deposits, obligations and debt documents were coming into play. However, the history of a banknote starts with the beginning of London banking in around 1640. The banking sector was rapidly growing, people used to leave their money in banks for security reasons and bankers had more money at their disposal. They used this money to give loans to other people.

At around 1660 to increase the number of deposits in order to increase the number of loans, London banks began to pay interest on deposits (V. Lannoye, 2015). Interest on the deposit would be covered by interest on the loan, which would be paid to the bank. People who left deposited their money in the bank would often receive receipts, which were easier to carry instead of coins. As a result, occasionally people would exchange those receipts as a method of payment. English banks decided to take the idea with the receipts a step further and labelled receipts with the bank's name instead of the receipt's holder. This was the moment when the modern banknote was born. People began exchanging receipts or banknotes, and the last person who received it could easily withdraw coins from the bank using that receipt (V. Lannoye, 2015).

1668 is the year when the first banknote was officially accepted at the English bank. A few years later in 1704, the banknotes were legally accepted in England (V. Lannoye, 2015).

To understand how banknotes can enter the economy Australian example of changing pounds to dollars can be analysed. In 1963 the Australian government has announced that it has decided to set up a new currency. The decision was to name the new currency dollar, and the design of the new banknote was also prepared. Special machinery was purchased and the first banknotes were printed in 1965. The Australian government has conducted a very effective educational session for Austrlians, which has later resulted in the quick replacement of pounds and shillings. In 1966, all previous banknotes were removed from circulation. The new banknotes were very well accepted and used by the public.

The new banknotes were made of a special quality paper, which would ensure uniqueness. For security reasons a watermark was added to a banknote around 25 millimeters square and metalised plastic thread through the banknote. The watermark and metalised plastic were both added at the step of printing. The printing was the highest quality called intaglio. In order to print intaglio style very expensive machinery and materials are required. This step has ensured that people who will try to replicate the new banknote will not be able to do that without special machinery (D. Solomon and T. Spurling, 2014).

Characteristics of a banknote

Below are presented the characteristics of a banknote:

  • Banknotes must be authorised, approved and issued by the government, where this banknote will be used as a method of payment.
  • A banknote must have a face value that will determine its value.
  • Banknotes must have national symbols that will allow to differentiate banknotes of different countries.
  • Banknotes can only be issued by the monetary authorities and the national bank of the country.
  • Banknotes have no maturity date and can be used as a method of payment, as long as they are authorised by the government.
  • Banknotes of one country might not be accepted as a payment method in another country.
  • The value of a banknote is defined by the economy of the country and the supply, and demand on the market.
  • Banknotes do not have any intrinsic value and they are not attached to any commodity.

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Author: Nikita Shtemenko