# Paper Money Explained: Definition, History, and Examples

## What Is Paper Money?

Paper money, the official currency circulated by a country’s central bank or treasury, plays a crucial role in transactions for acquiring goods and services. It often gets updated with security features to deter counterfeiting. Understanding its origins and evolution helps grasp its significance in today's financial ecosystem, especially as it shares space with digital currencies and credit systems.

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.

### Key Takeaways

*   Paper money is a country's official currency, regulated by central banks to align with monetary policy.
*   The concept of paper money originated in 7th century China as an alternative to carrying heavy metal coins.
*   Modern paper money, like the U.S. dollar and the euro, serves as fiat money with no intrinsic value beyond its acceptance as a medium of exchange.
*   Despite the rise of digital payments, paper money is still widely used, especially in areas without digital infrastructure.
*   The U.S. dollar is the dominant global reserve currency, with many countries using or pegging their currency to it.

## The History and Evolution of Paper Money

Paper money was first used in China in the 7th century A.D. to avoid carrying heavy metal coins for transactions. Like modern banking, individuals would deposit coins with a trustworthy party and receive a note indicating the amount. The note could then be redeemed for currency at a later date.

## Examples of Paper Money in Modern Economies

In the U.S., paper money is [fiat money](https://www.investopedia.com/terms/f/fiatmoney.asp), which means it has value only 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](https://www.investopedia.com/terms/f/federalreservebank.asp).

> **Important**
>
> The U.S. dollar has been the dominant reserve currency since the end of World War II. Prior to World War II, the British pound was the dominant reserve currency.

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](https://www.investopedia.com/terms/r/reservecurrency.asp) 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](https://www.investopedia.com/terms/e/europeanunion.asp)) use the euro as their official currency.

## Unique Aspects and Modern Challenges of Paper Money

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.

## Is Paper Money Fiat Money?

Yes, paper money is fiat money. Fiat money is any money that is considered legal tender. Paper money and coins are legal tender.

## Is Crypto Fiat Money?

Cryptocurrencies are not fiat money. Fiat money is determined by a nation's government and the government decides what money can be accepted as legal tender. Cryptocurrencies are not authorized by most governments as legal tender.

## Is Money Still Printed?

Yes, money is still printed, as paper money and coins are still used as legal tender throughout the nation. The [U.S. Bureau of Engraving & Printing](https://www.bep.gov/) is responsible for the design and printing of U.S. paper money.

## The Future of Paper Money  

Paper money, as an official medium of exchange, remains essential despite the rise of digital payments and the evolving landscape of monetary transactions. While many establishments in developed areas increasingly favor electronic transactions, paper money continues to hold significant value in economies and businesses that rely on physical currency. Its role, regulated by central banks, underscores its importance in monetary policy and as a barrier to counterfeiting, sustaining its relevance in global commerce.

> **Article Sources**
>
> 1.  Guinness World Record. "[First Paper Money](https://www.guinnessworldrecords.com/world-records/first-paper-money)."
>     
> 2.  EveryCRSReport. "[Brief History of the Gold Standard in the United States](https://www.everycrsreport.com/reports/R41887.html)."
>     
> 3.  Congressional Research Service. "[The U.S. Dollar as the World’s Dominant Reserve Currency](https://crsreports.congress.gov/product/pdf/IF/IF11707)."
>     
> 4.  World Population Review. "[Countries that Use the U.S. Dollar 2023](https://worldpopulationreview.com/country-rankings/countries-that-use-the-us-dollar)."
>     
> 5.  Board of Governors of the Federal Reserve System. "[The International Role of the U.S. Dollar](https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.html)."
>     
> 6.  European Union. "[Countries Using the Euro](https://european-union.europa.eu/institutions-law-budget/euro/countries-using-euro_en)."