Banknote

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A banknote—also called a bill (

National banknotes are often – but not always – legal tender, meaning that courts of law are required to recognize them as satisfactory payment of money debts.^[2] Historically, banks sought to ensure that they could always pay customers in coins when they presented banknotes for payment. This practice of "backing" notes with something of substance is the basis for the history of central banks backing their currencies in gold or silver. Today, most national currencies have no backing in precious metals or commodities and have value only by fiat. With the exception of non-circulating high-value or precious metal issues, coins are used for lower valued monetary units, while banknotes are used for higher values.

Counterfeiting, including the forgery of banknotes, is an inherent challenge in issuing currency. It is countered by anticounterfeiting measures in the printing of banknotes. Fighting the counterfeiting of banknotes and cheques has been a principal driver of security printing methods development in recent centuries.

History

Paper currency first developed in

The first banknote-type instrument was used in

True paper money, called "jiaozi", developed from these promissory notes by the 11th century, during the Song dynasty.^[20][21] By 960, the Song government was short of copper for striking coins, and issued the first generally circulating notes. These notes were a promise by the ruler to redeem them later for some other object of value, usually specie. The issue of credit notes was often for a limited duration, and at some discount to the promised amount later. The jiaozi did not replace coins but was used alongside them.

The central government soon observed the economic advantages of printing paper money, issuing a monopoly for the issue of these certificates of deposit to several deposit shops.^[13] By the early 12th century, the amount of banknotes issued in a single year amounted to an annual rate of 26 million strings of cash coins.^[15] By the 1120s the central government started to produce its own state-issued paper money (using woodblock printing).^[13]

Even before this point, the Song government was amassing large amounts of paper

The workforce employed in these paper money factories was quite large; it was recorded in 1175 that the factory at Hangzhou alone employed more than a thousand workers a day.[23] However, the government issues of paper money were not yet nationwide standards of currency at that point; issues of banknotes were limited to regional areas of the empire, and were valid for use only in a designated and temporary limit of three years.^[15]

The geographic limitation changed between 1265 and 1274, when the late southern Song government issued a nationwide paper currency standard, which was backed by gold or silver.^[15] The range of varying values for these banknotes was perhaps from one string of cash to one hundred at the most.^[15] Ever after 1107, the government printed money in no less than six ink colors and printed notes with intricate designs and sometimes even with mixture of a unique fiber in the paper to combat counterfeiting.

The founder of the Yuan dynasty, Kublai Khan, issued paper money known as Jiaochao. The original notes were restricted by area and duration, as in the Song dynasty, but in the later years, facing massive shortages of specie to fund their rule, the paper money began to be issued without restrictions on duration. Venetian merchants were impressed by the fact that the Chinese paper money was guaranteed by the State.

European explorers and merchants

According to a travelogue of a visit to Prague in 960 by Ibrahim ibn Yaqub, small pieces of cloth were used as a means of trade, with these cloths having a set exchange rate versus silver.^[24]

Around 1150, the Knights Templar would issue notes to pilgrims. Pilgrims would deposit valuables with a local Templar preceptory before embarking for the Holy Land and receive a document indicating the value of their deposit. They would then use that document upon arrival in the Holy Land to receive funds from the treasury of equal value.^[25][26]

In the 13th century, Chinese paper money of Mongol Yuan became known in Europe through the accounts of travelers, such as Marco Polo and William of Rubruck.^[16][27] Marco Polo's account of paper money during the Yuan dynasty is the subject of a chapter of his book, The Travels of Marco Polo, titled "How the Great Kaan Causeth the Bark of Trees, Made into Something Like Paper, to Pass for Money All Over his Country".^[17]

All these pieces of paper are, issued with as much solemnity and authority as if they were of pure gold or silver... with these pieces of paper, made as I have described, Kublai Khan causes all payments on his own account to be made; and he makes them to pass current universally over all his kingdoms and provinces and territories, and whithersoever his power and sovereignty extends... and indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan's dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold

— Marco Polo, The Travels of Marco Polo

In

Birth of European banknotes

The shift toward the use of these receipts as a means of payment took place in the mid-17th century, as the

The first short-lived attempt at issuing banknotes by a central bank was in 1661 by Stockholms Banco, a predecessor of Sweden's central bank Sveriges Riksbank.^[33] These replaced the copper-plates being used instead as a means of payment.^[34] This banknote issue was brought about by the peculiar circumstances of the Swedish coin supply. Cheap foreign imports of copper had forced the Crown to steadily increase the size of the copper coinage to maintain its value relative to silver. The heavy weight of the new coins encouraged merchants to deposit it in exchange for receipts. These became banknotes when the manager of the bank decoupled the rate of note issue from the bank currency reserves. Three years later, the bank went bankrupt, after rapidly increasing the artificial money supply through the large-scale printing of paper money. A new bank, the Riksens Ständers Bank was established in 1668, but did not issue banknotes until the 19th century.^[35]

Permanent issue of banknotes

The modern banknote rests on the assumption that money is determined by a social and legal consensus. A gold coin's value is simply a reflection of the supply and demand mechanism of a society exchanging goods in a free market, as opposed to stemming from any intrinsic property of the metal. By the late 17th century, this new conceptual outlook helped to stimulate the issue of banknotes. The economist Nicholas Barbon wrote that money "was an imaginary value made by a law for the convenience of exchange".^[36]

A temporary experiment of banknote issue was carried out by Sir William Phips as the governor of the Province of Massachusetts Bay starting on December 20, 1690^[37] to help fund the war effort against France.^[38] The other Thirteen Colonies followed in Massachusetts' wake and began issuing bills of credit, an early form of paper currency distinct from banknotes, to fund military expenditures and for use as a common medium of exchange.^[39] By the 1760s, these bills of credit were used in the majority of transactions in the Thirteen Colonies.^[40]

The first bank to initiate the permanent issue of banknotes was the

In the United States there were early attempts at establishing a central bank in 1791 and 1816, but it was only in 1862 that the federal government of the United States began to print banknotes.

Central bank issuance of legal tender

Originally, the banknote was simply a promise to the bearer that they could redeem it for its value in specie, but in 1833 the second in a series of

Until the mid-nineteenth century, commercial banks were able to issue their own banknotes, and notes issued by provincial banking companies were the common form of currency throughout England, outside London.^[43] The Bank Charter Act of 1844, which established the modern central bank,^[44] restricted authorisation to issue new banknotes to the Bank of England, which would henceforth have sole control of the money supply in 1921. At the same time, the Bank of England was restricted to issue new banknotes only if they were 100% backed by gold or up to £14 million in government debt. The Act gave the Bank of England an effective monopoly over the note issue from 1928.^[45][46]

Issue of banknotes

Today, a central bank or treasury is generally solely responsible within a state or currency union for the issue of banknotes. However, this is not always the case, and historically the paper currency of countries was often handled entirely by private banks. Thus, many different banks or institutions may have issued banknotes in a given country. Commercial banks in the United States had legally issued banknotes before there was a national currency; however, these became subject to government authorization from 1863 to 1932. In the last of these series, the issuing bank would stamp its name and promise to pay, along with the signatures of its president and cashier on a preprinted note. By this time, the notes were standardized in appearance and not too different from Federal Reserve Notes.

In a small number of countries, private banknote issue continues to this day. For example, by virtue of the complex constitutional setup in the United Kingdom, certain commercial banks in two of the state's four constituent countries (Scotland and Northern Ireland) continue to print their own banknotes for domestic circulation, even though they are not fiat money or declared in law as legal tender anywhere. The UK's central bank, the Bank of England, prints notes which are legal tender in England and Wales; these notes are also usable as money (but not legal tender) in the rest of the UK (see Banknotes of the pound sterling).

In the two

As with any printing, there is also a chance for banknotes to have printing errors. For U.S. banknotes, these errors can include board break errors, butterfly fold errors, cutting errors, dual denomination errors, fold over errors, and misalignment errors.[49]

Advantages and disadvantages

Prior to the introduction of banknotes, precious or semiprecious metals minted into coins to certify their substance were widely used as a medium of exchange. The value that people attributed to coins was originally based upon the value of the metal unless they were token issues or had been debased. Banknotes were originally a claim for the coins held by the bank, but due to the ease with which they could be transferred and the confidence that people had in the capacity of the bank to settle the notes in coin if presented, they became a popular means of exchange in their own right. They now make up a very small proportion of the "money" that people think that they have, as demand deposit bank accounts and electronic payments have negated much of the need to carry notes and coins.

Banknotes have a natural advantage over coins in that they are lighter to carry; but they are also less durable than coins. Banknotes issued by

1. Discounting to face value: Before national currencies and efficient clearing houses, banknotes were only redeemable at face value at the issuing bank. Even a branch bank could discount notes of other branches of the same bank. The discounts usually increased with distance from the issuing bank. The discount also depended on the perceived safety of the bank. When banks failed, the notes were usually partly redeemed out of reserves, but they sometimes became worthless.[52]^[53] The problem of discounting within a country does not exist with national currencies.
2. photocopiers and computer image scanners. Numerous banks and nations have incorporated many types of countermeasures in order to keep the money secure. However, extremely sophisticated counterfeit notes known as superdollars
   have been detected in recent years.
3. Manufacturing or issue costs. Coins are produced by industrial manufacturing methods that process the precious, semi-precious, or other metals, and require additions of alloy for hardness and wear resistance. By contrast, bank notes are printed paper (or polymer), and typically have a higher cost of issue, especially in larger denominations, compared with coins of the same value.^[dubious – discuss]
4. 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 and even polymer notes wear out much faster than coins.
5. Cost of transport. Coins can be expensive to transport for high value transactions, but banknotes can be issued in large denominations that are much lighter than the equivalent value in coins.
6. 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 expense of checking the banknote's security features and confirming acceptability of the issuing bank.

The different advantages and disadvantages of 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.

Materials used for banknotes

Paper banknotes

Until recently, most banknotes were made from

Most banknotes are made using the mould made process in which a watermark and thread is incorporated during the paper forming process. The thread is a simple-looking security component found in most banknotes. It is however often rather complex in construction, comprising fluorescent, magnetic, metallic and micro print elements. By combining it with watermarking technology the thread can be made to surface periodically on one side only. This is known as windowed thread and further increases the counterfeit resistance of the banknote paper. This process was invented by Portals, part of the De La Rue group in the UK. Other related methods include watermarking to reduce the number of corner folds by strengthening this part of the note. Varnishing and coatings reduce the accumulation of dirt on the note for longer durability in circulation.

Another security feature is based on windows in the paper which are covered by

When paper bank notes were first introduced in England, they resulted in a dramatic rise in counterfeiting.^[citation needed] The attempts by the Bank of England and the Royal Mint to stamp out currency crime led to new policing strategies, including the increased use of entrapment.^[58]

The characteristics of banknotes, their materials and production techniques (as well as their development over history) are topics that are not usually thoroughly examined by historians, even though there are now a number of works detailing how bank notes were actually constructed. This is mostly because historians tend to be more interested in a theoretical understanding of how money worked rather than how it was produced.^[59] The first great deterrent against counterfeiting was the death penalty for forgers, but this was not enough to stop the rise of counterfeiting. Over the 18th century, far fewer banknotes were circulating in England compared to the boom of bank notes in the 19th century; because of this, improved note-making techniques were not considered a compelling issue.

In the 18th century, banknotes were produced mainly by

In 1983,

Over the years, a number of materials other than paper have been used to print banknotes. This includes various textiles, including silk, and materials such as leather.^[66]

Even playing cards were used for currency in France in the early 19th century, and in French Canada from 1685 until 1757, the Colony of Louisiana, Dutch Guiana, and in the Isle of Man in the beginning of the 19th century, and again in Germany after World War I.

Most recently, Bisphenol S (BPS), has been frequently used in the production of banknotes worldwide. BPS is an endocrine disruptor that is subject to human dermal absorption through handling banknotes.^[67]

Vertical orientation

Vertical currency is a type of

A banknote is removed from circulation because of everyday wear and tear from its handling. Banknotes are passed through a banknote sorting machine to assess their authenticity and fitness for circulation, or may be classified unfit for circulation if they are worn, dirty, soiled, damaged, mutilated or torn. Unfit notes are returned to the central bank for secure online destruction by high-speed banknote sorting machines using a cross-cut shredder device similar to a paper shredder with security level P-5 (pieces smaller than 30 mm²) according to the standard DIN 66399–2. This small size decomposes a banknote into typically more than 500 tiny pieces and rules out reconstruction like a jigsaw puzzle because the shreds from many banknotes are commingled.

A subsequent briquettor compresses shredded paper material into a small cylindrical or rectangular form for disposal (e.g. landfill or burning).^[73] Before the 1990s, unfit banknotes were destroyed by incineration, with a higher risk of manipulations.

When a Federal Reserve Bank of the United States receives a cash deposit from a commercial bank or another financial institution, it checks the individual notes to determine whether they are fit for future circulation.^[74] About one-third of the notes that the Fed receives are unfit, and the Fed destroys them. US dollar banknotes last an average of more than five years.^[75]

Contaminated banknotes are also decommissioned and removed from circulation, primarily to prevent the spread of diseases. 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...^[76]

In the US, the nickname "Fed Shreds" refers to paper money which has been shredded after becoming unfit for circulation. Although these shredded banknotes are generally landfilled, they are sometimes sold or given away in small bags as souvenirs or as briquettes.^[77]

Polymer banknotes may be shredded and then melted down and recycled to form plastic products like building components, plumbing fittings, or compost bins.^[78]

• Shredded Banknotes
• 
  Fed Shreds as souvenir from the Federal Reserve Bank of San Francisco
• 
  Shreds of unfit

  US dollar

  notes with a typical size of less than 1.5 mm × 16 mm
• 
  Shredded and briquetted US dollar notes from the Federal Reserve Bank of New York (approx. 1000 pieces, 1 kg)
• 
  Shredded and briquetted

  US dollar notes from the Federal Reserve Bank of New York

  (approx. 1000 pieces, 1 kg)
• 
  Shredded and briquetted euro banknotes from the Deutsche Bundesbank, Germany (approx. 1 kg)

Intelligent banknote neutralisation systems

Intelligent banknote neutralisation systems (IBNS) are security systems which render banknotes unusable by marking them permanently as stolen with a degradation agent. Marked (stained) banknotes cannot be brought back into circulation easily and can be linked to the crime scene. Today's most used degradation agent is a special security ink which cannot be removed from the banknote easily and not without destroying the banknote itself, but other agents also exist. Today IBNSs are used to protect banknotes in automated teller machines, retail machines, and during cash-in-transit operations.

Dynamic Intelligent Currency Encryption

In the United States there are many laws that allow the confiscation of cash and other assets from the bearer if there is suspicion that the money came from an illegal activity.[80] Because a significant amount of U.S. currency contains traces of cocaine and other illegal drugs, it is not uncommon for innocent people searched at airports or stopped for traffic violations to have cash in their possession sniffed by dogs for drugs and then have the cash seized because the dog smelled drugs on the money. It is then up to the owner of the money to prove where the cash came from at his own expense. Many people simply forfeit the money.^[81] In 1994, the United States Court of Appeals, Ninth Circuit, held in the case of United States of America v. U.S. Currency, $30,060.00 (39 F.3d 1039 63 USLW 2351, No. 92-55919) that the widespread presence of illegal substances on paper currency in the Los Angeles area created a situation where the reaction of a drug-sniffing dog would not create probable cause for civil forfeiture.^[82]

Paper money collecting as a hobby

Banknote collecting, or

Trades

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. The emergence of currency third party grading services (similar to services that grade and "slab", or encapsulate, coins) also may have increased collector and investor interest in notes. Entire advanced collections are often sold at one time, and to this day single auctions can generate millions in gross sales. Today, eBay has surpassed auctions in terms of highest volume of sales of banknotes.^[83][84][85] However, rare banknotes still sell for much less than comparable rare coins. This disparity is diminishing as paper money prices continue to rise. A few rare and historical banknotes have sold for more than a million dollars.^[86]

There are many different organizations and societies around the world for the hobby, including the International Bank Note Society (IBNS), which currently assert to have around 2,000 members in 90 countries.^[87]

Novelty

The universal appeal and instant recognition of bank notes has resulted in a plethora of novelty merchandise that is designed to have the appearance of paper currency. These items cover nearly every class of product. Cloth material printed with bank note patterns is used for clothing, bed linens, curtains, upholstery and more. Acrylic paperweights and even toilet seats with bank notes embedded inside are also common. Items that resemble stacks of bank notes and can be used as a seat or ottoman are also available.

Manufacturers of these items must take into consideration when creating these products whether the product could be construed as counterfeiting. Overlapping note images and/or changing the dimensions of the reproduction to be at least 50% smaller or 50% larger than the original are some ways to avoid the risk of being considered a counterfeit. But in cases where realism is the goal, other steps may be necessary. For example, in the stack of bank notes seat mentioned earlier, the decal used to create the product would be considered counterfeit. However, once the decal has been affixed to the resin stack shell and cannot be peeled off, the final product is no longer at risk of being classified as counterfeit, even though the resulting appearance is realistic.

See also

Notes and references

Bibliography

• Atack, Jeremy; Passell, Peter (1994). A New Economic View of American History. New York: W.W. Norton and Co.
  ISBN 978-0-393-96315-1
  .
• Bowman, John S. (2000). Columbia Chronologies of Asian History and Culture. New York: Columbia University Press.
  ISBN 978-0-2311-1004-4
  .
• Ebrey; Walthall; Palais (2006). East Asia: A Cultural, Social, and Political History. Boston: Houghton Mifflin Company.
  ISBN 978-0-6181-3384-0
  .
• Gernet, Jacques (1962). Daily Life in China on the Eve of the Mongol Invasion, 1250–1276. Stanford University Press.
  ISBN 978-0-8047-0720-6
  .
• Needham, Joseph (1986). Science and Civilisation in China: Volume 5, Part 1. Cambridge University Press.
  ISBN 978-0-5218-7566-0
  .
• Mockford, Jack (2014). "They are Exactly as Banknotes are": Perceptions and Technologies of Bank Note Forgery During the Bank Restriction Period, 1797–1821 (PDF) (PhD). University of Hertfordshire.

External links

Wikimedia Commons has media related to Banknotes.

Wikisource has the text of the 1911 Encyclopædia Britannica article "Bank-Notes".

• Counterfeit money was a major problem in the 1850s – Pantagraph (Bloomington, Illinois newspaper)