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Paper Money

Updated on April 8, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Paper Money Definition

Paper money is a country’s currency in the form of bank notes which have a specific value and are used to pay for goods and services. Paper money holds the backing of a country’s government while the central bank keeps a controls over the note’s printing and circulation.

Paper Money

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Key Takeaways

Understanding Paper Money

Paper money represents a certain face value printed on the paper. It acts as a medium of exchange for trading, gifting and welfare purpose. Let us take you through the evolution of money to understand paper money better.

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Paper Money in the US

With the Mint Act of 1792, the US dollar or simply dollar became the United States of America’s official currency. In 1793, the first U.S. coins came into being. In 1861, due to the Civil War, the government issued and circulated its first paper money, referred to as greenbacks. GreenbacksGreenbacksGreenback refers to the first paper money issued by the United States government in the 19th century to finance the expenses of the American Civil War.read more were demand notes, and they were an attempt to finance the war. Greenbacks were retired in 1862. In their place were issued United States notes, also called legal tender notes.

It was not until 1913 that the government passed the Federal Reserve Act, which led to establishing the US Federal Reserve System. The act gave the Federal Reserve Banks the authority to issue the still in function – Federal Reserve Banknotes.

US Paper Money

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Gradually, the dollar became fiat money after 1970. The banknotes in the US are made from cotton fiber, giving them a unique texture to prevent counterfeit. The US dollar is a global reserve currency and is used by many other countries as their currency. Dollar comes in denominations of $1, $2, $5, $10, $20, $50 and $100.

The US dollar is one of the most powerful currencies in the world. One crucial reason that most currencies are usually measured against the dollar is that the dollar had emerged as economically strong after the World Wars. Besides, since it is a fiat currency, the US’s prosperity and internal stability have often ensured that it remains strong.

Paper Money in China

After dealing with commodity money for a long time, the people in China started to get tired from the weight of carrying metal coins around. Moreover, there started to be a shortage of certain metals. In the Tang Dynasty (618–907 CE) reign, many merchants started to keep their coins in a trustworthy agent’s custody.

In return, the agent recorded the number of coins submitted on a piece of paper which acted as a promissory note. The note could be used in trades and exchanged in return for coins from the agent.

Later on, the Song Dynasty saw the most earlier known appearances of paper notes backed by an authority. The dynasty issued paper money that had the backing of its administration and was named jiaozi. As the Chinese interacted with other cultures along the silk trail, other kingdoms and dynasties noticed the benefits of jiaozi and started adopting their own kind. With the changes in the dynasties, the money kept changing.

In December 1948, China saw its first renminbi (RMB), which translates to “people’s currency.” It was issued with the foundation of the People’s Bank of China (PBOC).  After the Civil War, the People’s Republic of China came into being, and the yuan earned itself the badge of being the only unified legal currency. Yuan comes in many denominations like the US denominations. The paper is made of the wood fiber.

China paper money

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The government launched several RMB series over the years. Recently, China was in the news for testing out its own digital currencyDigital CurrencyDigital currency is a currency found only in an electronic form as it is used for trading over the internet. They are famous for allowing transparent and secured digital payments. Although their popularity is constantly growing, their adoption as a reliable alternative to physical money is nowhere close. Some of the popular digital currencies are Ethereum, Bitcoin, and Litecoin.read more, Digital Yuan, which puts it in the race to develop the world’s first sovereign digital currency.

This has been a guide to what is Paper Money and its definition. Here we discuss examples of how paper money is used in the US and China. You can learn more from the following articles –