A banknote (often known as a bill, paper money or simply a note) is a kind of negotiable instrument, a promissory note made by a bank payable to the bearer on demand, used as money, and in many jurisdictions is legal tender. Along with coins, banknotes make up the cash or bearer forms of all modern fiat money. With the exception of non-circulating high-value or precious metal commemorative issues, coins are used for lower valued monetary units, while banknotes are used for higher values.
Advantages and Disadvantages
Originally, precious and semi-precious metals were made into coins and were used to negotiate and settle trades. Banknotes offer an alternative bearer form of money, but the advantages and disadvantages between the two forms of bearer money are complex and so in different circumstances the overall advantage can lie with either form.
The costs of using bearer money include:
- Manufacturing or issue costs. Coins are produced by industrial manufacturing methods that process the precious or semi-precious metals, and require additions of alloy for hardness and wear resistance. By contrast bank notes are printed paper (or polymer), and typically have a lower cost of issue, especially in larger denominations, compared to coin of the same value.
- Wear costs. Banknotes do not lose economic value by wear, since, even if they are in poor condition, they are still a legally valid claim on the issuing bank. However, banks of issue do have to pay the cost of replacing banknotes in poor condition and paper notes wear out much faster than coins.
- Cost of transport. Coins can be expensive to transport for high value transactions, but banknotes can be issued in large denominations that are lighter than the equivalent value in coins.
- Cost of acceptance. Coins can be checked for authenticity by weighing and other forms of examination and testing. These costs can be significant, but good quality coin design and manufacturing can help reduce these costs. Banknotes also have an acceptance cost, the costs of checking the banknote's security features and confirming acceptability of the issuing bank.
- Security. Counterfeiting paper notes is easier than forging coins, especially true given the proliferation of colour photocopiers and computer image scanners. Numerous banks and nations have incorporated many types of countermeasures in order to keep the money secure.
The different advantages and disadvantages between coins and banknotes imply that there may be an ongoing role for both forms of bearer money, each being used where its advantages outweigh its disadvantages.
Paper money originated in two forms: drafts, which are receipts for value held on account, and "bills", which were issued with a promise to convert at a later date.
Money is based on the coming to pre-eminence of some commodity as payment. The oldest monetary basis was for agricultural capital: cattle and grain. In Ancient Mesopotamia, drafts were issued against stored grain as a unit of account. A " drachma" was a weight of grain. Japan's feudal system was based on rice per year – koku.
At the same time, legal codes enforced the payment for injury in a standardized form, usually in precious metals. The development of money then comes from the role of agricultural capital and precious metals having a privileged place in the economy.
Such drafts were used for giro systems of banking as early as Ptolemaic Egypt in the 1st century BC.
The perception of banknotes as money has evolved over time. Originally, money was based on precious metals. Banknotes were seen as essentially an I.O.U. or promissory note: a promise to pay someone in precious metal on presentation (see representative money). With the gradual removal of precious metals from the monetary system, banknotes evolved to represent credit money, or (if backed by the credit of a government) also fiat money.
Notes or bills were often referred to in 18th century novels and were often a key part of the plot such as a "note drawn by Lord X for £100 which becomes due in 3 months time"
Banknotes have a limited lifetime, after which they are collected for destruction, usually recycling or shredding. A banknote is removed from the money supply by banks or other financial institutions due to everyday wear and tear from its handling. Banknote bundles are passed through a sorting machine that determines whether a particular note needs to be shredded, or are removed from the supply chain by a human inspector if they are deemed unfit for continued use – for example, if they are mutilated or torn. Counterfeit banknotes are destroyed unless they are needed for evidentiary or forensic purposes.
Contaminated banknotes are also decommissioned. A Canadian government report indicates:
Types of contaminants include: notes found on a corpse, stagnant water, contaminated by human or animal body fluids such as urine, feces, vomit, infectious blood, fine hazardous powders from detonated explosives, dye pack and/or drugs...
These are removed from circulation primarily to prevent the spread of diseases.
When taken out of circulation, Australian bank notes are melted down and mixed together to form plastic garbage bins.
Paper money collecting as a hobby
Banknote collecting, or Notaphily, is a rapidly growing area of numismatics. Although generally not as widespread as coin and stamp collecting, the hobby is increasingly expanding. Prior to the 1990s, currency collecting was a relatively small adjunct to coin collecting, but the practice of currency auctions, combined with larger public awareness of paper money have caused a boom in interest and values of rare banknotes.
Collectors often use a banknote catalog to find information about their banknotes or banknotes they may be interested in.
For years, the mode of collecting banknotes was through a handful of mail order dealers who issued price lists and catalogs. In the early 1990s, it became more common for rare notes to be sold at various coin and currency shows via auction. The illustrated catalogs and "event nature" of the auction practice seemed to fuel a sharp rise in overall awareness of paper money in the numismatic community. Entire advanced collections are often sold at one time, and to this day single auctions can generate well in excess of $1 million in gross sales. Today, eBay has surpassed auctions in terms of highest volume of sales of banknotes. However, as of 2005, rare banknotes still sell for much less than comparable rare coins. There is wide consensus in the paper money collecting arena that this disparity is diminishing as paper money prices continue to rise.
There are many different organizations and societies around the world for the hobby, including the International Bank Note Society (IBNS).