Definition of Banknotes
Knowing the evolution of the banknote helps with understanding what money has historically meant, what it means now, and how it works.
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Definition
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The term "banknote" is used interchangeably with paper money or currency and is, in effect, a promise to pay the bearer on demand the amount stated on the face of the note. To understand how this system of exchange evolved requires dipping into the history of paper money in Europe and elsewhere in the world.
European Banknotes
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The Chinese were the first to use money, as early as the seventh century. Europeans did not adopt this practice until much later, and paper money was not successful everywhere it was introduced prior to its use in Europe. In Persia, its use led to the total collapse of trade, according to the Global Village School article "Paper Money." The first European banknotes were issued by the Stockholm Banco in Sweden in 1661, and other countries followed. Early paper money still had its problems, however. The Banque Royale was set up in France in 1718 but collapsed when people discovered that it had issued twice as much paper money as the country's entire supply of gold and silver.
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The Bank of England
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The Bank of England is the world's longest continuous issuer of banknotes, according to "Paper Money." It was founded in 1694 to raise money for King William III's war against France and immediately started to issue notes in return for deposits. The notes were good for exchange because of the promise to pay the bearer the sum on demand. The Bank Charter Act of 1844 enabled the Bank of England to achieve gradual monopoly of notes issue in England and Wales, and the last private bank notes in England and Wales were issued in 1921 by the Somerset bank, Fox, Fowler and Co., according to the Bank of England website.
Significance
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Prior to the innovation of the Bank of England, money and currency were one and the same, writes James Turk, founder of Gold Money.com in the opinion article "The Evolution of Currency." Money took the form of tangible assets, such as gold or silver coins, which circulated as currency. This system had several disadvantages, however. Coins were heavy and bulky and were required in large numbers to make high-value transactions. Coins could also be devalued by getting scratched and worn. With the evolution of banknotes, the tangible asset coins could stay in the vaults of the bank while the paper notes circulated as currency in their place.
United States
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After the financial panics of 1893 and 1907, the Federal Reserve Act of 1913 created the Federal Reserve System as the nation's central bank to regulate the flow of money and credit and enhance economic stability and growth. The new system was authorized to issue Federal Reserve Notes, which are the only U.S. currency now produced, according to the Federal Reserve Bank of San Francisco. Since 1933, Federal Reserve Notes "are not redeemable in gold, silver or any other commodity, and receive no backing by anything," according to the United States Department of Treasury website. In a July 31, 1996, CRS Report for Congress, G. Thomas Woodward explains that Federal Reserve Notes are a type of fiat money, lacking intrinsic value as a commodity and produced and introduced by fiat of the government. Such money is a debt of the government, and like any other debt from a creditworthy debtor, such IOUs are assets to those who hold them, which makes them suitable as currency, writes Woodward.
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References
Resources
- Photo Credit banknote in hip-pocket of jeans image by Aleksandr Lobanov from Fotolia.com
