What are Bank Notes?

Published by Thomas Herold in Banking, Economics, Laws & Regulations, Trading

'Bank Notes' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A bank note refers to a promissory note that can be negotiated by the bank which issues it. The holders of such bank notes will be paid on demand. The face of the note in question states the amount which is payable. As with coins, bank notes represent legal tender. They make up the modern forms of money along with coins. These bank notes are also called simply notes, or bills.

In past times throughout Europe, Great Britain, and the United States, bank notes could be redeemed for such precious metals as silver (Great Britain and the U.S.) and gold (Europe, Great Britain, and the U.S.). They have also been exchangeable into financial assets like bank-issued bonds. Since the United States abandoned the gold standard under then-President Richard Nixon in 1971, bills are no longer redeemable for gold.

These bank notes only have legal tender transaction value at all today because the government backs them by the good faith and trust in the United States government and Treasury. Despite the facts that such notes are essentially worthless and only have value because people choose to believe in them, these bills are utilized every day around the world in literally billions of financial transactions. This means that for better or worse, bank notes are both money and currency, at least for as long as consumers continue to believe in the fiat money system (that states money can be created out of thin air by central banks).

Before bank notes arose as a form of payment, individuals and businesses throughout all of human history paid for their services and goods using other stores of tangible value, mostly in the form of precious metals like gold and silver. Banks were the earliest organizations which came up with the idea of issuing bills to represent the precious metals in a more convenient and safe to transport format.

Governments later followed suit and began to provide such notes as a means to exchange them in transactions or to redeem them at bank windows for silver or gold. The paper had no value whatsoever, but it stood as a symbol of value. The certificates which were sometimes known as silver certificates of gold certificates proved to be far more practical to carry around in bulk since they were considerably smaller and lighter.

Around that time, governments shrewdly learned that they could debase their currencies by minting coins with base metals in place of the old silver and gold pieces like Spanish silver, $20 gold pieces, and British gold and silver sovereigns. Individuals began to carry around a combination of money in the form of both paper bills and base metals coins from the mid 20th century.

Once the United States abandoned the gold standard, the other countries of the world followed suit. The notes may no longer be exchanged for silver and gold as they could for hundreds of years. They may still be converted into other kinds of assets which are financially valuable. Economists call this financial convertibility. Money that is not convertible physically still has value in theory. This is true while the central banks and commercial banks have the assets to support them and keep the system going.

In the U.S., it is the Federal Reserve Bank that carries the responsibility of regulating the quantity of currency both created and distributed. The Bureau of Printing and Engraving creates this form of money literally today. Once upon a time in the United States, commercial banks had the ability to issue banknotes alongside the U.S. Treasury. Today only the Federal Reserve Bank is permitted to create such notes in the United States. National central banks issue the bank notes which come from different countries.

Each bank note clearly denotes its value. The bills include a number of tough security features which help to decrease the chances of forgery. Despite this, there are still countless examples of bank note forgery on every continent and most countries around the world.

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The term 'Bank Notes' is included in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.