Banknote Definition Example How Does It Work

Banknote Definition

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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.

Key Takeaways

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.

How Does Banknotes Work?

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 moneyPaper MoneyPaper money is a country’s currency in banknotes that have a specific value and pay for goods and services. Paper money holds a country’s government backing while the central bank controls the note’s printing and circulation.read more 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 banksCommercial BanksA commercial bank refers to a financial institution that provides various financial solutions to the individual customers or small business clients. It facilitates bank deposits, locker service, loans, checking accounts, and different financial products like savings accounts, bank overdrafts, and certificates of deposits.read more 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.

Banknote 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.

Banknotes by Country

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 stripeWatermark portraitWindowed color-shifting threadOptical security devicePlanchettesFluorescence unique color and numbersRaised 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 printPolymer substrateTop-to-bottom windowIntaglio printRolling color effect3D imageFlying birdsColor changing birdImage encrypted in the small windowReversing numberFluorescent 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 portraitHologramSilver foil patch bearing a hologramRaised printUltra Violet numberClear 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 thread3-D security ribbonBell in the inkwellPortrait watermarkColor shifting inkFederal Reserve System sealRaised printingMicro printingLinen and cotton paper (in 1:3 ratio)U.S. Treasury sealNational 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 printWatermarkSee-through registerMicroletteringLatent imageOptically variable ink (OVI)Fluorescence ink printIdentification markSecurity 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 watermarkMicro textLatent imageSee-through registerRaised ink prinkWhite denomination watermarkIntaglio printSecurity threadSecurity feature for visually impairedOptically variable ink (OVI)

Advantages

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 accountsChecking AccountsA checking account is a bank account that allows multiple deposits and withdrawals. Additionally, it provides superior liquidity.read more 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.

Disadvantages

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.