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.

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. Before 1971, 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.

More than 350 million people around the world use the dollar as their main form of currency — and more than $17 trillion of economic activity is accounted for with U.S. paper money. U.S. paper money is the official currency in a number of countries and areas outside of the territorial United States. These countries include Ecuador, El Salvador, Zimbabwe, Timor-Leste, Micronesia, Palau, and The Marshall Islands. The dollar is also used in all U.S. territories, including Puerto Rico and Guam. Turks and Caicos and the British Virgin Islands, both British territories in the Caribbean, also use U.S. paper money as their currency.

There are also countries that regularly use the U.S. dollar alongside their own local currency, including Bahamas, Barbados, St. Kitts and Nevis, Belize, Costa Rica, Nicaragua, Panama, Myanmar, Cambodia, and Liberia, as well as several Caribbean territories.

The euro is another form of paper money that is used in multiple countries. As of 2020, 19 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 in 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.