What Is the Meaning of Paper Money? | FIAT Money 101

What is the meaning of paper money? Well, that depends on the period of time you’re asking about.

In this article, we’ll share the meaning of paper money today, explain how it used to be different, and provide examples from the United States and the United Kingdom that detail when everything changed.

This article is part of our series on banking basics, ranging from opening different types of bank accounts around the world to understanding how various aspects of the banking system operate.

Feel free to use the table of contents to jump ahead to the sections most relevant to you.

Table of Contents

  1. What Is the Meaning of Paper Money?
  2. What Is the Difference Between Paper Money and Bank Money?
  3. Frequently Asked Questions
  4. Do You Want Help Opening Bank Accounts?

What Is the Meaning of Paper Money?

Paper money refers to banknotes, made of paper (or similar materials), issued by a government or central bank. While paper money was historically backed by precious metals like gold and silver (e.g. the gold standard), this is no longer the case. 

Instead, paper money today is considered FIAT money, which derives its value from the trust and confidence in the issuing government and underlying economy.

What Is the Difference Between Paper Money and Bank Money?

The main difference between paper money and what some people call bank money is that paper money exists in physical form while bank money exists digitally in electronic form.

In other words, paper money is physically exchanged for services, goods, or deposited and withdrawn from banks while bank money is only accessible through electronic transactions.

That said, it is possible to withdraw paper money from a bank, following electronic transactions.

What Do Banks Do With Paper Money?

Banks facilitate a number of roles when it comes to the handling of paper money, including distribution, facilitating deposits and withdrawals, cash management, currency exchange, initiating destruction, and identifying counterfeit money.

In other words, banks help consumers use and manage their money while also helping central banks manage the efficient flow of money in an economy.

Here’s another look at what banks do with paper money:

  • Distribution of money to consumers
  • Accepting deposits of money from customers
  • Facilitating withdrawals of money from customers
  • Identifying counterfeit paper money in circulation
  • Managing cash reserves to support short-term needs
  • Exchanging domestic and foreign currencies
  • Identifying paper money that is no longer suitable for circulation

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Frequently Asked Questions

Below are a few of the most common questions we receive from people looking into the meaning of paper money. If you have further questions you would like to ask our team, don’t hesitate to get in touch.

What Is the Definition of Paper Money in History?

In history, the definition of paper money changes depending on the country, ruling government, and period of time. For example, prior to 1931 in the United Kingdom and 1971 in the United States, paper money referred to currency on the gold standard. This means the central bank of both countries was obligated to exchange paper currency for gold. However, after these two dates, the countries came off the gold standard and the value of the paper money they issued was instead determined by market forces.

What Is an Example of Paper Money?

An example of paper money is the United States Dollar (USD or $). The amount of USD printed each year is determined by the Federal Reserve System (or the FED). However, the act of printing money is executed by the United States Treasury Department through the Bureau of Engraving and Printing.

What Is Paper Money Also Known As?

Paper money is also known as FIAT money, which is a currency issued by governments through central banks as legal tender. Importantly, FIAT money is not backed by hard assets like gold, silver, or other precious metals. Instead, it is based on the confidence that people have in the issuer, which is the government issuing and regulating the currency.

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GlobalBanks Team
GlobalBanks Team

The GlobalBanks editorial team comprises a group of subject-matter experts from across the banking world, including former bankers, analysts, investors, and entrepreneurs. All have in-depth knowledge and experience in various aspects of international banking. In particular, they have expertise in banking for foreigners, non-residents, and both foreign and offshore companies.

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