What Is Paper Money?
Paper money is a country's official, paper currency that is circulated for the transactions involved in acquiring goods and services. The printing of paper money is typically regulated by a country's central bank or treasury in order to keep the flow of funds in line with monetary policy.
Paper money tends to be updated with new versions that contain security features and attempt to make it more difficult for counterfeiters to create illegal copies.
Key Takeaways
- Paper money is a country's official, paper currency that is circulated for the transactions involved in acquiring goods and services.
- The printing of paper money is typically regulated by a country's central bank or treasury in order to keep the flow of funds in line with monetary policy.
- Paper money tends to be updated with new versions that contain security features and attempt to make it more difficult for counterfeiters to create illegal copies.
Understanding Paper Money
The first recorded use of paper money was purported to be in the country of China during the 7th century A.D. as a means of reducing the need to carry heavy and cumbersome strings of metallic coins to conduct transactions. Similar to making a deposit at a modern bank, individuals would transfer their coins to a trustworthy party and then receive a note denoting how much money they had deposited. The note could then be redeemed for currency at a later date.
Example of Paper Money
In the U.S., paper money is considered fiat money. This means that it has no actual value except as an accepted medium of exchange. Before1971, this was not the case; U.S. banknotes were backed by a certain amount of gold, which was dictated by the Federal Reserve.
The U.S. dollar has been the dominant reserve currency since the end of World War II. Prior to World War II, the British pound was the dominant reserve currency.
There are 17 countries and territories that use the U.S. dollar as their currency. These include Ecuador, El Salvador, American Samoa, Guam, Micronesia, Panama, and Zimbabwe. There are also many countries that peg their currency to the U.S. dollar, including Lebanon, Hong Kong, and Saudi Arabia.
There are also countries that regularly use the U.S. dollar alongside their own, such as Mexico, Canada, and Costa Rica. The U.S. dollar is so widely used that 60% of globally disclosed official foreign reserves were in U.S. dollars as of 2021. This compares to 21% for the euro, 6% for the Japanese yen, 5% for the British pound, and 2% for the Chinese renminbi.
The euro is another form of paper money that is used in multiple countries. As of 2023, 20 of the 27 member states in the European Union (EU) use the euro as their official currency.
Special Considerations
While paper money is the most accepted medium of exchange, companies often issue shares of their own company to purchase other companies and reward their staff. Shares are units of ownership in a company that entitle the shareholder to an equal distribution of any profits. Of all accepted mediums of exchange, shares are closest to paper money because they can be exchanged on the open market for cash.
Is Paper Money Fiat Money?
Yes, paper money is fiat money. Fiat money is any money that is considered legal tender. Paper money and coins are legal tender.
Is Crypto Fiat Money?
Cryptocurrencies are not fiat money. Fiat money is determined by a nation's government and the government decides what money can be accepted as legal tender. Cryptocurrencies are not authorized by most governments as legal tender.
Is Money Still Printed?
Yes, money is still printed, as paper money and coins are still used as legal tender throughout the nation. The U.S. Bureau of Engraving & Printing is responsible for the design and printing of U.S. paper money.
The Bottom Line
With the advent of credit cards and digital payments, paper money is not as commonly used as it once was. Many establishments in developed cities around the world no longer accept paperless money; however, paper money is still used extensively in nations and businesses that haven't incorporated digital payments into their infrastructure.
FAQs
Paper money can be traced back to the promissory notes of ancient China, Carthage, and the Roman Empire, over 2000 years ago—but the banknote as we know it today emerged in the 7th century and is still evolving.
What is an example of paper money used? ›
In the 19th Century, paper money as we know it today emerged, which was a fiat currency or a banknote. Examples include a dollar, euro, or peso etc. Most of the paper money today is fiat money. Fiat money is backed by the government of a country and is considered to be a legal tender.
Why was there a need for paper money? ›
There was a shortage of copper from which coins were struck around the year 960, so the government issued the first banknotes and before long the economic advantages of printing paper money became apparent.
What is money used for? ›
medium of exchange, something that people can use to buy and sell from one another. Perhaps the easiest way to think about the role of money is to consider what would change if we did not have it. If there were no money, we would be reduced to a barter economy.
What type of paper is used for money? ›
There are no wood fibers or starch in currency paper. Instead, like high quality stationery, currency paper is composed of a special blend of cotton and linen fibers. The strength comes from raw materials continuously refined until the special feel of the currency is achieved.
When was money first used? ›
When was money invented? The earliest evidence of money comes from around 3,000 BC in ancient Mesopotamia (modern-day Middle East).
What is the definition of paper money? ›
Paper money is a country's official, paper currency that is circulated for the transactions involved in acquiring goods and services. The printing of paper money is typically regulated by a country's central bank or treasury in order to keep the flow of funds in line with monetary policy.
Is paper money used today? ›
Paper money
The United States no longer issues bills in larger denominations, such as $500, $1,000, $5,000, and $10,000 bills. But they are still legal tender and may still be in circulation. The U.S. Bureau of Engraving and Printing creates U.S. paper currency.
Where is paper money made? ›
The Bureau of Engraving and Printing receives the print order and manufactures Federal Reserve notes at its facilities in Washington, D.C., and Fort Worth, Texas. To get a more detailed look of how banknotes are made, Discover more about how banknotes are made.
Can you still use paper money? ›
We explain what to do with your old banknotes and where to exchange them. (Image credit: Photography taken by Mario Gutiérrez.) Old £20 and £50 paper notes stopped being legal tender in the UK on 30 September 2022. This means you can't use them in shops or as payment any more.
The $100 note features a portrait of Benjamin Franklin on the front of the note.
Who is on the $2 bill? ›
The United States two-dollar bill ($2) is a current denomination of United States currency. A portrait of Thomas Jefferson, the third president of the United States (1801–1809), is featured on the obverse of the note. The reverse features an engraving of John Trumbull's painting Declaration of Independence ( c. 1818).
Why do we need money? ›
Basic Needs: Money is essential for meeting our basic needs such as food, shelter, and clothing. Without money, it is impossible to obtain the things we need to survive. Education: Money plays a significant role in education. It enables us to pay for school fees, buy books, and access other educational resources.
What is an example of the use of money? ›
Money, in its simplest form, is a tool that facilitates the exchange of goods and services. It acts as a universally accepted medium of exchange that allows us to buy a loaf of bread, book a holiday, or even purchase a house, without needing to barter.
What are the three main uses of money? ›
To summarize, money has taken many forms through the ages, but money consistently has three functions: store of value, unit of account, and medium of exchange. Modern economies use fiat money-money that is neither a commodity nor represented or "backed" by a commodity.
What is considered paper money? ›
What Is Paper Money? Paper money is a country's official, paper currency that is circulated for the transactions involved in acquiring goods and services. The printing of paper money is typically regulated by a country's central bank or treasury in order to keep the flow of funds in line with monetary policy.
What was the paper money in the Song Dynasty? ›
Jiaozi (Chinese: 交子) was a form of promissory note which appeared around the 11th century in the Sichuan capital of Chengdu, China. Numismatists regard it as the first paper money in history, a development of the Chinese Song Dynasty (960–1279 CE).
What was the use of paper money AP World History? ›
The use of paper money originated in China during the 7th century, with the Tang Dynasty issuing the first known forms of currency made from mulberry bark. This early form of paper money quickly gained acceptance due to its convenience, portability, and resistance to counterfeiting.
What was the paper money in 1862? ›
Greenbacks—named for their distinctive color—were the first national currency of the United States. The notes, though not redeemable for gold or silver, were lawful money backed by the credit of the federal government.
