What Is a Banknote? Definition, Design, and Security

A banknote is a common form of physical currency used in daily transactions. It represents a government or central bank’s promise to pay the bearer a certain amount. These pieces of paper money are widely accepted as a medium of exchange for goods and services.

Understanding Banknotes

A banknote functions as legal tender, meaning it is officially recognized by law as a valid means to settle debts and make payments. Its value does not come from any intrinsic material worth but rather from government decree and public trust. This makes banknotes a form of fiat money, currency declared legal tender by a government but not backed by a physical commodity such as gold or silver. The value of fiat currency is derived from the relationship between supply and demand, alongside the stability of the issuing government. In the United States, Federal Reserve notes are considered legal tender.

Historically, banknotes were promissory notes issued by commercial banks, redeemable for precious metals. Modern national banknotes, issued by central banks, have no backing in precious metals. The United States officially ended the convertibility of the dollar to gold in 1971, solidifying the dollar’s status as a fiat currency backed by the “full faith and credit” of the U.S. government. This system ensures that banknotes maintain their value through public acceptance and confidence in the issuing authority.

Design and Security Features

Banknotes are produced using specific materials and incorporate various security features to prevent counterfeiting and ensure public confidence. U.S. currency paper is a blend of 75 percent cotton and 25 percent linen, making it more durable than standard wood pulp paper. This unique paper also contains small red and blue security fibers distributed randomly throughout its composition. The tactile feel of genuine U.S. currency is slightly rough due to the intaglio printing process.

Key security elements are integrated into the design:

• A watermark, a faint image visible when held to light, is present on denominations $5 and higher, often matching the portrait on the bill.
• Security threads are embedded vertically in notes $5 and higher, glowing different colors under ultraviolet (UV) light and containing microprinted text of the denomination.
• Color-shifting ink is used for numerals on denominations $10 and higher, changing from copper to green when tilted.
• Microprinting, consisting of tiny words that may require magnification to see, is found in various locations on notes $5 and higher.
• The $100 note features a blue 3-D Security Ribbon woven into the paper, with images of bells and 100s that move as the note is tilted.

These intricate features collectively make banknotes difficult to replicate, safeguarding the integrity of the currency.

Issuance and Circulation

The Federal Reserve Board is the issuing authority for Federal Reserve notes in the United States, ensuring an adequate supply of cash meets public demand. Each year, the Federal Reserve Board places an order for new currency with the U.S. Treasury Department’s Bureau of Engraving and Printing (BEP). This order accounts for the public’s anticipated demand and the replacement of worn-out notes. Once printed by the BEP, new currency is transported to Federal Reserve Bank cash offices.

These Reserve Banks then distribute banknotes to the public primarily through depository institutions. Banks order cash from the Federal Reserve to meet local demand, and this is how currency enters general circulation.

Federal Reserve Banks also process banknotes to verify authenticity and determine if they are fit for recirculation. Worn or damaged currency received by commercial banks is sent to the Federal Reserve Banks, where it is shredded.

Approximately 90 percent of new notes delivered annually replace currency removed from circulation due to wear and tear. The BEP offers redemption services for severely mutilated currency.