What is Paper Money?

Also known simply as a banknote, paper money is a negotiable instrument that is issued by a bank or a central government and is considered legal tender within a particular country. Like any type of currency that is issued by a government and identified as legal tender within a given country, the value of paper money is determined by the denomination assigned to it. While in recent years the use of debit cards has reduced the number of transactions that are conducted using paper money, the medium still remains one of the most popular mediums of exchange throughout the world.

When most people think of paper money, their first thought is to the notes or bills that are issued by a government, and managed by banks. Each banknote is created by an authorized agency of the government, and is equipped with identifying marks that make illegal replication of the notes somewhat difficult. In recent years, technological advances have made it possible to implement additional procedures to print paper money that is even more difficult to replicate outside authorized agencies, as well as refine the processes for identifying counterfeit bills when they are distributed.

Along with bank notes used as currency, the promissory note is also considered paper money. Notes of this type are simply agreements that bind a borrower to repay a lender the face value of the note at some point in the future. The face value may include both the principal and any interest applied to the transaction, or may simply be a flat figure that represents the principal borrowed plus a flat fee for the loan. Individuals holding a promissory note can sometimes use these notes as security on loans they wish to establish with various providers, assuming that the use of this type of asset as collateral is agreeable to the provider.

In most countries, there is a continual process of issuing new paper money, while also collecting older notes that have become worn over the years. Banks are often involved in the process of receiving theses older notes, and forwarding them to the specified agency in the nation’s federal banking system. The used notes eventually are delivered to the agency responsible for managing the flow of paper money within the nation, and are destroyed. New paper money is issued to replace the destroyed notes, thus maintaining a balance of the amount of currency that is currently in circulation. This strategy allows the government to monitor the total amount of currency that is used within the country, and thus ensure that the government does have enough assets to adequately back the face value of all notes that are currently in use.