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Paper Money: Definition, History, Use, Need For It, And Examples
Published: January 5, 2024
Learn about the history, definition, and use of paper money in finance. Explore the need for it and discover examples of its significance.
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Paper Money: Definition, History, Use, Need for It, and Examples
Welcome to our “FINANCE” category, where we dive into various topics related to the world of finance. In today’s post, we will be discussing paper money – its definition, history, use, need for it, and provide some examples to help you better understand its significance in our modern economy. So, let’s jump straight into it!
Key Takeaways:
- Paper money is a form of currency that is made from paper or similar materials and is widely used in transactions worldwide.
- Its history dates back to ancient China, and its introduction was a significant milestone in the development of modern economies.
What is Paper Money?
Paper money, also known as fiat currency, refers to a form of currency that is physically represented by banknotes or bills. These banknotes are made from paper or other materials and are recognized as a legal tender by the government that issues them. Unlike commodity money, which has intrinsic value (such as gold or silver), paper money has value only because the government guarantees its acceptance as a means of payment.
A Brief History of Paper Money
The origins of paper money can be traced back to ancient China during the Tang Dynasty (618-907 AD). It is believed that the first paper money, known as “Jiaozi,” was used to facilitate trade and economic activities. This early form of paper money served as a convenient alternative to carrying heavy copper coins.
Over the centuries, paper money evolved and spread to other regions of the world. In the 13th century, Marco Polo described the use of paper money during his travels to the Mongol Empire. However, it wasn’t until the 17th century that paper money was officially introduced in Europe, followed by its adoption in other parts of the world.
The Use of Paper Money
Today, paper money is used as a primary medium of exchange in most economies worldwide. It plays a crucial role in facilitating trade, enabling people to buy goods and services, paying debts, and saving for the future. The convenience of paper money lies in its portability and the ease of its transfer compared to other forms of payment.
Alongside physical banknotes, the use of digital forms of money, such as credit cards and mobile payments, has been increasing. These digital representations of paper money have further revolutionized the way transactions are conducted, making payments faster and more secure.
The Need for Paper Money
Paper money serves several essential functions in our economy:
- Medium of Exchange: Paper money allows for smooth and efficient transactions, replacing the need for bartering or carrying valuable commodities.
- Store of Value: People can accumulate paper money as a means of preserving their wealth over time. It provides a stable medium for savings and serves as a tangible representation of financial security.
- Unit of Account: Paper money provides a standardized unit for measuring the value of goods and services. It allows for easy price comparison and helps in evaluating economic trends.
Without paper money, economies would face significant challenges in conducting trade and managing their financial systems. It would be difficult to conduct large-scale business transactions, create a stable pricing system, or provide a universally accepted medium of exchange.
Examples of Paper Money
Throughout history, numerous countries have issued their own paper currencies, each with unique designs and denominations. Here are a few examples of widely used paper currencies:
- The United States Dollar (USD)
- The Euro (EUR)
- The British Pound (GBP)
- The Japanese Yen (JPY)
- The Chinese Yuan (CNY)
These examples represent just a fraction of the vast array of paper currencies that exist around the world. Each currency tells a story of its nation’s history, culture, and economic significance.
As we conclude our exploration of paper money, we hope you have gained a deeper understanding of its definition, historical roots, use, and importance in today’s economy. Paper money plays a fundamental role in facilitating trade, preserving wealth, and providing a standard unit of account.
So, the next time you hold a banknote in your hand, take a moment to appreciate the significance it holds in our financial system, connecting nations, and enabling economic progress.
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Paper Money
Last Updated :
21 Aug, 2024
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Table Of Contents
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.
Table of contents
Understanding paper money, paper money in the us, paper money in china, recommended articles.
- Paper money or a banknote is a form of currency that bears different denominations in most cases and is used as an authorized medium to make payments for goods and services. The denominations represent the value of the notes.
- They have been around since 1000 AD when China started issuing them due to the inconvenient weight of the coins.
- Though initially backed by precious metals, most paper money today is fiat money. The government backs fiat money. Fiat money does not hold any intrinsic value and is instead valued based on the stability of the government.
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.
- Millenniums ago, people participated in the barter system of exchange to acquire any commodity they were in need of. People exchanged a commodity in exchange for another. The objects of exchange were anything from weapons, metals, fabric, animal skin, to food products.
- This was inefficient due to the difficulty in equating the value of one item with another. For example, knowing the worth of wooden logs is difficult when one wants to barter it with an exact value of corn or rice.
- Gradually, some societies started using gold and silver as a medium of exchange as they were precious metals with huge demand. The Lydian Kings are said to be the inventor of money as they produced the first coins around 600 BC.
- Coins made of metal such as gold, silver and copper prospered as a medium of exchange in different societies. It started creating a shortage of metals in addition to weighing down the carriers with their weight.
- A promissory note started appearing as a solution to this problem. The first paper money was issued in China under the Song Dynasty (AD 960–1279). The notes were backed by silver or gold. Paper notes surfaced in Europe after over 500 years when the legendary explorer Marco Polo mentioned about their existence in China.
- Till 1971, the paper notes continued to work as commodity money backed with the values of gold or silver. 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. The value of commodity money equated to the weight of the substance it was made from. Fiat money does not hold any such intrinsic value.
- The value of fiat money is based on the stability of the government that has issued it. For the countries under recession or facing political crisis, the value of their currency falls sharply, reducing the value of their fiat money.
- Fiat money allows the printing control to lie with a country's central bank. It gives the bank an avenue to issue more notes in shortage. It often poses the threat of printing an undue amount of notes which could lead to inflation.
- Paper money in countries such as India, China, Mexico and the like endure the brunt of counterfeit. As such, governments worldwide keep coming with different methodologies to overcome this issue to strengthen their currency's security. Becoming cashless with digital payments and cryptocurrency was one such move, in addition to enhancing the convenience.
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. Greenbacks 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.
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.
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.
The government launched several RMB series over the years. Recently, China was in the news for testing out its own digital currency, 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 -
- Special Drawing Rights
- Hard Money Loan
- Neutrality of Money
Paper Money
What is Paper Money?
Paper money is a medium of exchange for goods or services within an economy . It is printed on paper, rather than in coin form.
How Does Paper Money Work?
Paper notes are the most generally accepted forms of paper money. In most cases, each country in the world has its own paper money, but in many cases several countries use the same money (such as the Euro or the U.S. dollar). A country's government designs and manufactures that country's paper money .
Some paper money is fiat money , meaning that it has no intrinsic value . That is, the paper used to create the money is not worth very much in terms of its value as a raw material. Most paper money is fiat money , and its value comes from what it represents rather than what it is. Before 1971, the U.S. dollar was not fiat money -- it was backed by a corresponding amount of gold held with the Federal Reserve.
Why Does Paper Money Matter?
Most paper money only has value because people want it. This idea is what made beaver pelts, shells, peppercorns, tulip bulbs and other things into money at various points in history. However, when the demand (or fashion) faded for some of these goods (or more people found they really needed corn instead of beaver pelts), these systems became cumbersome. Paper money solves this problem because it is exchangeable for any good or service that people want (rather than just beaver pelts).
This isn't to say that paper is the only form of viable money today. Quite often, companies use shares of their own stock as money to acquire other companies, and anybody who has ever watched a crime show knows that cigarettes can buy a lot in prison.
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paper money
Other forms: paper moneys
- noun currency issued by a government or central bank and consisting of printed paper that can circulate as a substitute for specie synonyms: folding money , paper currency see more see less types: show 11 types... hide 11 types... fractional currency paper currency in denominations less than the basic monetary unit fiat money money that the government declares to be legal tender although it cannot be converted into standard specie Federal Reserve note , bank bill , bank note , banker's bill , banknote , bill , government note , greenback , note a piece of paper money (especially one issued by a central bank) silver certificate formerly a bank note issued by the United States Treasury and redeemable in silver c-note , hundred dollar bill a United States bill worth 100 dollars fifty , fifty dollar bill a United States bill worth 50 dollars twenty , twenty dollar bill a United States bill worth 20 dollars ten dollar bill , tenner a United States bill worth 10 dollars five dollar bill , five-spot , fiver a United States bill worth 5 dollars two dollar bill a United States bill worth 2 dollars buck , clam , dollar , dollar bill , one dollar bill a piece of paper money worth one dollar type of: currency the metal or paper medium of exchange that is presently used
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Definition of paper money noun from the Oxford Advanced Learner's Dictionary
paper money
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fiat money , in a broad sense, all kinds of money that are made legal tender by a government decree or fiat. The term is, however, usually reserved for legal-tender paper money or coins that have face values far exceeding their commodity values and are not redeemable in gold or silver .
(Read Milton Friedman’s Britannica entry on money.)
Throughout history, paper money and banknotes had traditionally acted as promises to pay the bearer a specified amount of a precious metal, typically silver or gold. The continental currency issued during the American Revolution , the assignats issued during the French Revolution , the “ greenbacks ” of the American Civil War period, and the paper marks issued in Germany in the early 1920s are historical examples of fiat money. These episodes marked deviations from the gold standard or bimetallic systems that prevailed from the early 19th through the mid-20th century. Under the post- World War II Bretton Woods system, the U.S. dollar served as an international reserve currency, backed by gold at a fixed value of $35 an ounce.
By the late 20th century, it had become impossible for the United States to maintain gold at a fixed rate, and in August 1971, U.S. Pres. Richard M. Nixon announced that he would “suspend temporarily the convertibility of the dollar into gold or other reserve assets.” In fact, the move spelled the end of the Bretton Woods system and the last vestiges of the gold standard. Within two years, most major currencies “floated,” rising and falling in value against one another based on market demand . According to the quantity theory of inflation , excessive issuance of fiat money can lead to its depreciation in value.
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What Is Currency?
Understanding currency, money vs. currency, currency trading, the bottom line.
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Currency: What It Is, How It Works, and How It Relates to Money
Investopedia contributors come from a range of backgrounds, and over 25 years there have been thousands of expert writers and editors who have contributed.
Currency is a medium of exchange for goods and services. In general, it's money in the form of paper and coins, usually issued by a government and generally accepted at its face value as a method of payment.
Currency is the primary medium of exchange in the modern world, having long ago replaced bartering as a means of trading goods and services.
In the 21st century, a new form of currency has entered the vocabulary and realm of exchange: virtual currency, also known as cryptocurrency. Virtual currencies, such as Bitcoin and Ethereum, have no physical form or government backing in the United States. They are traded and stored electronically.
Key Takeaways
- Currency is a generally accepted form of payment usually issued by a government and circulated within its jurisdiction.
- The value of any currency fluctuates constantly in relation to other currencies.
- Currency is a tangible form of money, which is an intangible system of value.
- Many countries accept the U.S. dollar for payment, while others peg their currency value directly to the U.S. dollar.
- Cryptocurrency is a 21st-century innovation and exists only electronically.
Currency in some form has been in use for at least 3,000 years. At one time only in the form of coins, currency proved to be crucial to facilitating trade across continents.
A key characteristic of modern currency is that it is worthless in itself. That is, bills are pieces of paper rather than coins made of gold, silver, or bronze.
The concept of using paper as a currency may have been developed in China as early as 1000 B.C.E., but the acceptance of a piece of paper in return for something of real value took a long time to catch on. Modern currencies are issued on paper in various denominations, with fractional issues in the form of coins.
The terms money and currency are often thought to mean the same thing. However, while related, they have different meanings.
Money is a broader term that refers to an intangible system of value that makes the exchange of goods and services possible, now and in the future. Currency is simply one tangible form of money.
Money is used in a variety of ways, all related to its future use in some kind of transaction. For example, money is a store of value. This means that it has and maintains a certain value that supports ongoing exchanges. People know that the money they received today essentially will have the same value next week when they need to make a purchase or pay a bill.
Money is also referred to as a unit of account. That means it can be used to account for changes in the value of items over time. Businesses use money as a unit of account when they prepare a budget or give assets a value. Profits and losses are established and relied upon using money as a unit of account.
Money also has certain properties that allow for the smooth exchange of goods:
- It is fungible , or exchangeable, so it doesn't need to be re-valued for every transaction.
- It is durable so it lasts for many exchanges over time.
- It is convenient to carry and divide.
- It is recognizable so that people can trust it and confidently complete their exchanges of goods and services.
- The supply of money should be stable so that its value is reliable.
Understanding what money is clarifies the meaning of currency. It's a form of money used every day by people all over the world. Checks are another form of money, known as money substitutes. Cigarettes have even been a form of money, as they were for soldiers during the Second World War.
The Bureau of Engraving and Printing is responsible for printing America's paper currency. Its parent agency is the U.S. Department of the Treasury. The U.S. Mint, founded in 1792, is "the nation’s sole manufacturer of legal tender coinage and is responsible for producing circulating coinage for the nation to conduct its trade and commerce."
Types of Currency
The United States Mint defines currency as money in the form of paper and coins that's used as a medium of exchange. Currencies are created and distributed by individual countries around the world.
U.S. currency in paper form is issued by the Bureau of Engraving and Printing as $1, $2, $5, $10, $20, $50, and $100 bills. The $500, $1,000, $5,000, and $10,000 bills are no longer issued but those still in circulation are redeemable at full face value. Currency issued in 1861 or earlier is no longer valid and would not be redeemable at full face value.
U.S. currency in the form of coins is issued by the Mint in denominations of 1¢, 5¢, 10¢, 25¢, 50¢, and $1.
There are over 200 national currencies currently in circulation. Including the U.S., 42 countries either use the U.S. dollar or peg their currencies directly to the dollar. According to the International Monetary Fund (IMF) the dollar makes up 58.8% of the foreign exchange reserves.
Most countries issue their own currencies. For example, Switzerland's official currency is the Swiss franc, and Japan's is the yen. An exception is the euro , which has been adopted by most countries that are members of the European Union.
Some countries accept the U.S. dollar as legal tender in addition to their own currencies, like the Bahamas, Zimbabwe, and Panama. For some time after the founding of the U.S. Mint in 1792, Americans continued to use Spanish coins because they were heavier and presumably felt more valuable.
There are also branded currencies, like airline and credit card points. These are issued by companies and are used only to pay for the products and services to which they are tied.
The exchange rate is the current value of any currency relative to another currency. As a result, rates are quoted for currency pairs, such as the EUR/USD (euro to U.S. dollar). Exchange rates fluctuate constantly in response to economic and political events.
These fluctuations create the market for currency trading. The foreign exchange market where these trades are conducted is one of the world's largest markets, based on sheer volume. All trades are in large volumes, with a standard minimum lot of 100,000. Most currency traders are professionals investing for themselves or for institutional clients that include banks and large corporations.
The foreign exchange market has no physical address. Trading is entirely electronic and goes on 24 hours a day to accommodate traders in every time zone.
For most people, currency exchange typically is done at an airport kiosk or a bank before we go on a trip or while traveling.
Consumer advocates say that travelers get the best value by exchanging cash at a bank or at an in-network ATM. Other options may have higher fees and unattractive exchange rates.
What Does Currency Mean?
The term currency refers to the tangible form of money that is paper bills and coins. It's used as a medium of exchange that's accepted at face value for products and services as well as for savings and the payment of debt.
What's an Example of Currency?
One example of currency is any of the U.S. paper bills you may have on hand. It is any of the coins the U.S. issues, such as the penny, nickel, and quarter. Currency can also be the paper bills and coins issued by the governments of other countries across the globe.
What's the Difference Between Money and Currency?
Money is an intangible system of value that provides the means for the ongoing exchange of goods and services in a society. Money has taken many forms since it overtook the system of bartering. Currency is a tangible form of it. So, instead of, say, bartering agricultural produce for the clothing you may need, you can use currency—paper notes and coins—to obtain it.
Currency is a generally accepted form of payment or money used to facilitate the exchange of goods and services. Most commonly it exists as coins or bills issued by a country. However, in the 21st century, virtual currencies—which have no physical form and are not issued by the government—have become popular, as well.
Glyn Davies. "A History of Money," Chapter 2. University of Wales Press Cardiff, 2016.
Pickering, John. "The History of Paper Money in China." Journal of the American Oriental Society, vol. 1, no. 2, 1844, pp. 136-142.
National Library of Medicine. " Smoke 'Em If You Got 'Em: Cigarette Black Markets In U.S. Prisons And Jails ."
USA.gov. " Bureau of Engraving and Printing ."
US Mint. " About the United States Mint ."
U.S. Mint. " Coin Term Glossary ."
USA.gov. " United States Currency ."
United Nations Treasury. " UN Operational Rates of Exchange ."
OANDA. " US Dollar Currency ."
International Monetary Fund. " Currency Composition of Official Foreign Exchange Reserves ."
OANDA. " Swiss Franc Currency ."
OANDA. " Japanese Yen Currency ."
OANDA. " Euro Currency ."
Financial Industry Regulatory Authority. " Currency Risk: Why It Matters to You ."
X Global Markets Ltd. " The Principles Behind Lots Trading and Pips Calculation ."
Forex. " What Is Forex? "
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Definition of fiat money
Examples of fiat money in a sentence.
These examples are programmatically compiled from various online sources to illustrate current usage of the word 'fiat money.' Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. Send us feedback about these examples.
Word History
1876, in the meaning defined above
Dictionary Entries Near fiat money
Cite this entry.
“Fiat money.” Merriam-Webster.com Dictionary , Merriam-Webster, https://www.merriam-webster.com/dictionary/fiat%20money. Accessed 15 Oct. 2024.
More from Merriam-Webster on fiat money
Britannica.com: Encyclopedia article about fiat money
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Meaning of paper currency in English
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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 ...
t. e. A banknote - also called a bill (North American English), paper money, or simply a note - is a type of negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes were originally issued by commercial banks, which were legally required to redeem the notes for legal tender (usually ...
Paper money definition: currency in paper form, such as government and bank notes, as distinguished from metal currency.. See examples of PAPER MONEY used in a sentence.
Today, paper money is used as a primary medium of exchange in most economies worldwide. It plays a crucial role in facilitating trade, enabling people to buy goods and services, paying debts, and saving for the future. The convenience of paper money lies in its portability and the ease of its transfer compared to other forms of payment.
The meaning of PAPER MONEY is money consisting of government notes and banknotes. money consisting of government notes and banknotes; bank money… See the full definition. Games & Quizzes; Games & Quizzes; Word of the Day; Grammar; Wordplay; Word Finder; Thesaurus; Join MWU; Shop; Books; Merch; Settings;
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 or a banknote is a form of ...
PAPER MONEY definition: 1. money in paper form, rather than coins 2. money in paper form, rather than coins 3. money in the…. Learn more.
Paper notes are the most generally accepted forms of paper money. In most cases, each country in the world has its own paper money, but in many cases several countries use the same money (such as the Euro or the U.S. dollar). A country's government designs and manufactures that country's paper money. Some paper money is fiat money, meaning that ...
PAPER CURRENCY definition: → paper money. Learn more.
paper money meaning: 1. money in paper form, rather than coins 2. money in paper form, rather than coins 3. money in the…. Learn more.
A brief history of paper money. Paper money boasts a surprisingly long history, with its roots tracing back to ancient China: The Tang Dynasty (618-907 AD): This period marks the earliest known use of paper money.The Tang Dynasty in China issued what they called "flying money," a paper-based currency that circulated for centuries.. Evolution from receipts: Fast forward to Europe in the 1700s.
The meaning of PAPER CURRENCY is variant of paper money. Love words? You must — there are over 200,000 words in our free online dictionary, but you are looking for one that's only in the Merriam-Webster Unabridged Dictionary.. Start your free trial today and get unlimited access to America's largest dictionary, with:. More than 250,000 words that aren't in our free dictionary
currency issued by a government or central bank and consisting of printed paper that can circulate as a substitute for specie
Definition of paper money noun in Oxford Advanced Learner's Dictionary. Meaning, pronunciation, picture, example sentences, grammar, usage notes, synonyms and more.
currency, in industrialized nations, portion of the national money supply, consisting of bank notes and government-issued paper money and coins, that does not require endorsement in serving as a medium of exchange; among less developed societies, currency encompasses a wide diversity of items (e.g., livestock, stone carvings, tobacco) used as exchange media as well as signs of value or wealth.
The continental currency issued during the American Revolution, the assignats issued during the French Revolution, the " greenbacks " of the American Civil War period, and the paper marks issued in Germany in the early 1920s are historical examples of fiat money. These episodes marked deviations from the gold standard or bimetallic systems ...
Paper money definition: currency in paper form, such as government and bank notes, as distinguished from metal currency.. See examples of PAPER MONEY used in a sentence.
2 meanings: → another name for paper money paper currency issued by the government or the central bank as legal tender and.... Click for more definitions.
U.S. currency in paper form is issued by the Bureau of Engraving and Printing as $1, $2, $5, $10, $20, $50, and $100 bills. ... The term currency refers to the tangible form of money that is paper ...
The meaning of FIAT MONEY is money (such as paper currency) not convertible into coin or specie of equivalent value.
paper currency meaning: → paper money. Learn more.
Paper currency systems have no tendency to long-term price stability and poor capacity to stabilise short-term prices. Times, Sunday Times ( 2012 ) Six centuries earlier , the notion that paper currency could replace coins made of precious metals might have seemed even dafter.
Fiat money. Yuan dynasty banknotes are a medieval form of fiat money. Fiat money is a type of currency that is not backed by a precious metal, such as gold or silver, or backed by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tender, and is authorized by government regulation.