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What is a Bank Note?

Mary McMahon
Updated May 16, 2024
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A bank note is a promissory note issued by a bank. It is payable on demand, sometimes in the form of precious metals like gold and silver, and sometimes in exchange for assets such as bonds issued by the bank. Bank notes are considered legal tender, and they are used in billions of financial transactions all over the world every day. A bank note, in other words, is currency or money.

Originally, people paid for goods and services with objects of physical value, such as precious metals. Over time, governments began issuing bank notes, pieces of paper which could be exchanged for these objects of value. Although the paper itself is physically worthless, it represents value. These certificates were much lighter and more practical to carry around than piles of gold and silver. Small denominations of currency were cast in coins made from less precious metals, so people generally carried around a mixture of bank notes in paper and small coin.

Over time, the use of a gold or silver standard to back up bank notes was abandoned. This means that a bank note in the United States, for example, can no longer be exchanged with a bank for gold or silver, but it is still convertible into other financially valuable assets. This is known as financial convertibility, differentiating it from physical convertibility. Money which is not physically convertible is still valuable as long as banks have the assets to support it.

In the United States, the Federal Reserve Bank regulates the amount of currency that is made and distributed by the Bureau of Printing and Engraving. All bank notes in the United States have emblems indicating that they are issued by the Federal Reserve. The values of these bank notes are also clearly printed, and they include security features to reduce the risk of forging. Banknotes from other nations are issued by their respective central banks.

Some people collect historical examples of paper money, or banknotes from other countries because they are objects of interest. This is a branch of numismatics, the study of money, currency, and financial systems. In some cases, a bank note may no longer be considered legal currency, but it may have acquired numismatic value. A Confederate bank note from the American Civil War, for example, is not technically money, but is has monetary value because it is an object of interest. People may also establish collections of antique coins in addition to paper money.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By KoiwiGal — On May 16, 2012

@anon30878 - I believe that bank notes in India originated with the British. They would have wanted all their colonies to follow the same system they had at home.

It was actually a bit of a surprise to realize how much bank notes have changed over the years, even fairly recently. I was watching an episode of Downton Abbey which is set less than a hundred years ago and at one point a character fished out twenty pounds to give to someone. They were old style, what would now be obsolete bank notes.

They looked more like certificates or contracts than what I would think of as cash.

I mean that makes sense, since that's basically what bank notes evolved from. They are still just a contract with the bank and the government that they are worth a certain amount of money.

But, it was still a surprise to see them like that.

By indigomoth — On May 15, 2012

The reason I know about the fact that they used to back up bank notes with gold and/or silver is from an interesting theory I read recently about The Wizard of Oz.

You see, that book was written at a time when the US government was deciding whether they should continue to only issue money that was able to be backed up by actual gold that they had in reserves, or if they should begin to include silver as well.

Frank L. Baum, the author of the original novel really wanted them to switch to silver. So, in The Wonderful Wizard of Oz Dorothy wears silver slippers (not ruby) and walks along the yellow (or gold) brick road. In the end she realizes that the silver slippers were her way out of trouble the whole time.

All the characters represent various politicians (which makes the fact that, for example, the lion is described as cowardly, a bit more vicious).

There isn't an official statement from Baum saying that this was his real intention, but as far as I know most scholars think it's too telling to be coincidence and take the theory as fact.

By anon30878 — On Apr 26, 2009

What is the story of Indian bank notes?

By anon28883 — On Mar 23, 2009

What are the provisions? Does it make any impact in view of tax point?

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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