Paper Money: Definition, History, Use, Need for It, and Examples

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.

There are 17 countries and territories that use the U.S. dollar as their currency. These include Ecuador, El Salvador, American Samoa, Guam, Micronesia, Panama, and Zimbabwe. There are also many countries that peg their currency to the U.S. dollar, including Lebanon, Hong Kong, and Saudi Arabia.

There are also countries that regularly use the U.S. dollar alongside their own, such as Mexico, Canada, and Costa Rica. The U.S. dollar is so widely used that 60% of globally disclosed official foreign reserves were in U.S. dollars as of 2021. This compares to 21% for the euro, 6% for the Japanese yen, 5% for the British pound, and 2% for the Chinese renminbi.

The euro is another form of paper money that is used in multiple countries. As of 2023, 20 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 of 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.

The Bottom Line

With the advent of credit cards and digital payments, paper money is not as commonly used as it once was. Many establishments in developed cities around the world no longer accept paperless money; however, paper money is still used extensively in nations and businesses that haven't incorporated digital payments into their infrastructure.