What Is the Difference Between a Bank Note & Currency?

There was a time when a "bank note" and "currency" were one and the same. This ended in the 20th century, and the two concepts are today opposed. In 2011, as macroeconomic problems continue to plague most of the world, with no end in sight, the concept of a "bank note" has been revived.

Bank Notes and Currency

A bank note is a promise. It is a promise from the issuing authority that the note is worth a certain amount of a commodity. The issuing authority was most often the government, and the commodity was most often gold. A bank note, most commonly, was the currency of a country that was issued by the state and backed by a definite amount of gold. As of 1933, gold was eliminated as the monetary standard and was replaced by private banks.

What is Currency?

Broadly speaking, currency is the only permitted medium of exchange within a certain legal jurisdiction. Currency itself has value depending on how much of it exists versus how much economic production occurs within a jurisdiction. Too much currency with too little production means inflation, and the currency can become worthless. Therefore, currency must have intrinsic value. This value stabilizes the currency and imposes fiscal discipline on the government that issues it. That stabilization mechanism has traditionally been gold. The problem with gold, as University of Nebraska economist Tarik Abdel-Monem has written, was that if gold left a country due to balance of payments difficulties, the economy would become unbalanced and could possibly lead to serious recession or depression. The argument for fiat currency was that a central bank could adjust for these kinds of crises more quickly than could a real bank note currency.

What is a Bank Note?

Currency backed by gold, or some other commodity, is called a bank note. It certifies that the paper you hold in your hand has intrinsic worth. The "note" says that a certain indicated amount of gold exists that gives that paper its value. The wars of the 19th and 20th century, especially World War I, forced governments to print more and more money, and many advanced economies had to leave the gold standard so as to finance their wars.

Fiat Currencies

The entire world, as of 2011, creates currencies by "fiat." Whether a banking cartel prints the currency, as in the U.S., or the government, as in China, the value of the currency is what that authority says it is. Citizens accept it because there is no other option. There is no discipline in either government spending or consumer debt because the dollar has no value except what consumers and bankers give it by their faith in its strength. As soon as this faith disappears, so does the currency.