Banknote

A banknote refers to a country's currency in the form of paper. It is a legal tender used for financial transactions. As a promissory note with a face value printed on it, its holder can claim payment on demand. A typical dollar bill in your pocket is a banknote.

Every country in the world has its own banknote issued by its central bank. U.S. banknotes, also known as the Federal Reserve Notes, constitute more than 99 percent of all U.S. currency in circulation. The rest includes the United States notes, silver certificates, and national bank notes. As of now, Federal Reserve Notes are the only currency notes issued in the U.S. The U.S. Federal Reserve issues them.

• A banknote is a legal negotiable instrument with an imprinted face value.
• It is printed in the national currency and holds the central government guarantee, making it a legal tender for monetary exchange.
• To avoid its forging, the banknotes are uniquely created to include various high-security features like security thread and optically variable ink (OVI).
• China is known as the creator of paper currency since the first paper money was issued as receipts during the Tang Dynasty in the 7th century.

The history of banknotes can be traced back to the seventh century. This is the time when China first came up with the concept of paper money by releasing receipts. However, the evolution of paper money took time.

In the early days, the objects like gold or silver were offered by people for buying goods or services from the other party. But eventually, these physical assets were replaced with bank notes. 

In old times, there was no central bank. All commercial banks could print and issue their own notes, lay down their requirements, and cooperate with each other. Banks would secure these notes with gold. People used to transact using these notes. Thus, allowing the exchange of objects of value. 

But over time, with the emergence of the central banking system, the power to issue the bank notes vested in the Federal Reserve Bank. Thus, the Federal Reserve attained monopoly over their printing and issue. These notes were also backed by the U.S. government, making it a legal instrument.

Even during this time, the notes were redeemed to the Federal Reserve in gold. However, in 1971, the gold standard came to an end. The U.S. came up with the fiat system. Under this, the notes were issued in good faith rather than any security. It meant that the Federal Reserve stood behind the note and it must be universally accepted as a unit of specific value.

At present, the U.S. Bureau of Engraving and Printing (BEP) prints Federal Reserve Notes. The Federal Reserve issues them to the commercial banks for circulation. To obtain the notes, the commercial banks must maintain a reserve account with the Federal Reserve and pay its face value.

Every note states that the Federal Reserve owes its bearer the amount printed on it. The bearer can use them for making purchases, paying for services, clearing debts, etc. These fixed denomination notes with store value are payable on demand to the bearer without any interest. Let’s understand it further with an example.

Suppose Mr. A gave $100 (banknote) to Miss B as a gift. She went to a grocery store and bought grocery items worth $100 with that note. She could do so because she was in the possession of the note. This made her the bearer and gave her the right to use it as desired.

On the other hand, Mr. A could not use the note anymore. This is because he no longer held the possession of that legal tender.

Every country has a different currency in which its banknote is issued. However, some of the standard features that every note has are a portrait of a national leader, face value, serial number, and name of the issuing bank. 

#1 - Canada

The Dominion of Canada notes were first released in 1870, valuing 25¢, $1, $2, $500 and $1000. Canadian dollar notes are now available in the denominations of $5, $10, $20, $50 and $100 with high-tech security features. Some of the security features are as follows:

• Holographic stripe
• Watermark portrait
• Windowed color-shifting thread
• Optical security device
• Planchettes
• Fluorescence unique color and numbers
• Raised ink

The material used in the Canadian notes is usually a polymer. Recently, Canada came up with vertical $10 notes bearing the portrait of a Canadian civil rights activist Viola Desmond.

#2 - Australia

Australia launched its first series of notes of $1, $2, $10 and $20 in 1966. The Reserve Bank of Australia and Commonwealth Scientific and Industrial Research Organization (CSIRO) introduced the polymer notes. These were highly durable compared to paper money. At present Australian dollar notes include $5, $10, $20, $50 and $100.

Some of their unique features are:

• Background print
• Polymer substrate
• Top-to-bottom window
• Intaglio print
• Rolling color effect
• 3D image
• Flying birds
• Color changing bird
• Image encrypted in the small window
• Reversing number
• Fluorescent ink

#3 - United Kingdom

The UK first released banknotes in 1694 for acquiring funds for the war between King William III and France. The UK banknotes are available in Euros and values of £5, £10, £20 and £50. Their key security features include:

• A sizeable see-through window with the Queen's portrait
• Hologram
• Silver foil patch bearing a hologram
• Raised print
• Ultra Violet number
• Clear and sharp colors and lines

#4 - United States

In 1690, the Massachusetts Bay Colony came up with the colonial notes to raise money for the military expeditions. At present, the U.S. bank notes are found in American dollars in the denominations $1, $2, $5, $10, $20, $50 and $100. The unique characteristics of these notes are:

• Security thread
• 3-D security ribbon
• Bell in the inkwell
• Portrait watermark
• Color shifting ink
• Federal Reserve System seal
• Raised printing
• Micro printing
• Linen and cotton paper (in 1:3 ratio)
• U.S. Treasury seal
• National symbols of freedom

#5 - India

Indian notes emerged in 1950 in the Indian currency, Rupee (Rs. or ₹). It was in the face values of Rs. 2, Rs. 5, Rs. 10 and Rs. 100. Today, we can find ₹10, ₹20, ₹50, ₹100, ₹200, ₹500 and ₹2000 notes circulating in the country. Its unique features are

• Intaglio print
• Watermark
• See-through register
• Microlettering
• Latent image
• Optically variable ink (OVI)
• Fluorescence ink print
• Identification mark
• Security thread

Moreover, the nation has strict provisions for counterfeit activities. It is infamous for rampant counterfeit. Recently, it underwent significant changes as ₹2000 notes were introduced to arrest growing instances of black money accumulation.

#6 - China

The Tang Dynasty of China holds the credit for discovering paper currency in the 7th century. The Yuan Renminbi is the currency, and the notes are available in ¥0.1, ¥0.5, ¥s1, ¥s5, ¥s 10, ¥s20 and ¥s50. Its distinct characteristics are:

• Portrait watermark
• Micro text
• Latent image
• See-through register
• Raised ink prink
• White denomination watermark
• Intaglio print
• Security thread
• Security feature for visually impaired
• Optically variable ink (OVI)

Banknotes are ubiquitous and valuable for a number of reasons:

• Convenience - The main reason for the switch to notes has been convenience. A note is a physical asset with a face value. Being lightweight and thin, it can be easily handled, carried, exchanged, stored, and counted.
• Medium of exchange - Every note comes with a printed face value. It can be used to make payment against the purchase of products or services and meet debt obligations for the amount equivalent to this value.
• Acceptability - Notes are a universally accepted mode of exchange. The American note is recognized and accepted worldwide as legal tender. This is because the U.S. government and Federal Reserve back it.
• Access - People without credit cards or checking accounts can use notes for transactions. The bearer of a note automatically becomes its owner.
• Storage - A note has a standard and fixed denomination that is printed as its face value. The face value of the note is always higher than the cost of the paper and printing incurred on it. Moreover, every note is recognized with this face value. So, in contrast to coins or gold, any number of notes can be stored with ease for future use.
• Relatively safe - With strong security features, the modern notes are relatively safe legal tenders. Every note comes with numerous security features to discourage its forging or duplicity. In addition, the features are periodically updated to ensure authentication and deter counterfeiting.

• Lack of durability - Since the material used in notes is paper, it is not durable and can get easily torn, melt in water or burnt in a fire. In any such case, the notes will lose their value.
• Counterfeiting - The practice of printing and illegal circulation of the fake currency is widely prevalent. Counterfeiting cannot be eliminated despite the continuous efforts of the central government and Federal Banks to secure the notes.
• Hyperinflation - Printing and issuance of more notes may result in hyperinflation. Printing more notes without a rise in production will increase the prices and result in hyperinflation. This will erode the value of the currency.
• Other risks - This negotiable instrument carries the risk of theft, increased black money, and corruption in society.

This has been a Guide to Banknote and its Definition. Here we discuss an example of the bank notes and how it works along with advantages and disadvantages. You can learn more about Finance from the following articles –

• Loan Note
• Structured Notes
• Bills of Exchange vs. Promissory Note
• Negotiable Instruments Meaning
• Treasury Strips