Paper money has a long history of transactional use in modern society. Despite the prevalence and popularity of paper checks as well as debit and credit cards, paper money still has a prominent role in the economy. Paper money must be constantly redesigned to avoid counterfeiting, and the printing of bills is subject to political as well as economic changes. The role of paper money is defined by both transactional use and a nation’s monetary policy.

The first consistent use of paper money can be traced to China in the 10th century. Probably due to a copper shortage, the Chinese government first printed paper bills in lieu of coins; paper money would increase in popularity in trade between nations. By the late 19th century, Western nations such as France and Germany, along with Japan, adopted Britain’s “gold standard,” meaning that paper money would be backed by gold. This standardization allowed currency prices of various nations to remain relatively price stable, increasing faith in trade between countries. The United States adopted the gold standard in 1900.

Significance

According to monetary historian and author Glyn Davies, money in all of its forms acts as a payment means and an exchange medium, and holds value. Paper money maintains an extensive role in developed economies in particular because of the uniformity and stability that cash provides; users of paper money understand what a bill is worth for commercial transaction purposes, and that it will be worth that same amount tomorrow, next week or next year. (Inflation, or prices rising relative to the value of money, means that a dollar might buy less tomorrow than it does today. Still, a merchant will recognize a dollar as being worth 100 cents or four quarters, regardless of changes in inflation.) As with many items of value, paper money also holds particular significance for collectors. Because governments must periodically change paper bills to avoid counterfeiting and to restock supply, paper money designs that are rare or that have been retired are generally valuable to collectors of currency.

Function

If paper money has significance because its value is standardized, a major function of paper money is that it is a liquid asset. This means that a government can increase the supply of money in part by printing more bills, as is often the policy during a recession. In the United States, monetary supply is controlled by the Federal Reserve, the central bank which, in conjunction with the U.S. Treasury, can order bills to be produced by the Bureau of Engraving and Printing. Along with bank deposit regulations, the paper money supply helps a central bank to control the supply of money and to help stabilize the economy.

Considerations

It should be noted that the function of paper money as a monetary control is a somewhat controversial notion. The United States abandoned the gold standard in 1933. Although exchange rates would eventually be fixed to the U.S. dollar, the idea of “fiat currency,” or money that is valuable simply because a government says it is, rather than because it is backed by something of physical value such as gold, means that a paper bill effectively has no intrinsic value. A second point of consideration is that paper bills ultimately wear out. The expense of producing, maintaining and replacing paper money adds an inefficiency to governments and an expense to society. For this reason, nations such as Canada have adopted gold dollar coins, which are more durable in the long run, although U.S. consumers have largely resisted such a change and efforts by the U.S. government to popularize dollar coins have failed.

Future

Paper bills are prominent primarily due to ease of use. One of the major reasons that paper money developed in the first place was because paper was easier and lighter to carry than metal coins, especially coins in large amounts. Ironically, efficiency of transactions is one reason why the role of cash (and subsequently, paper checks) has diminished in recent years. Debit cards have supplanted many paper money transactions since the cards, which deduct funds directly from a checking account, are heralded as being convenient for consumers to use in addition to being safer to carry than cash. Still, with many of the world’s economies pegged to the dollar and with global trade increasing, paper money both in the United States and abroad will continue to play a major role in commerce.

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