Paper Money defined as currency note used as medium of exchange and issued by State Government. People consider currency notes is a kind of money which performs all the function as good medium of exchange.
Paper currency is convertible in the sense that it may convert in to gold and precious metals while it may inconvertible because it is not exchangeable in to coins.
Now a day’s, Like Credit Cards (form of plastic money) paper money got more popularity than other forms of money.
4 Types of Paper Money
- Representative Paper Money
- Convertible Paper Money
- Inconvertible Paper Money
- Fiat Money
- Merits or Advantages of Paper Money
Advantages and Disadvantages of Paper Money
Life and death, Plus and Minus, Right and Left, Up and Down. There are always two aspects of each thing we see in our everyday life. Similarly, Paper money has pros and cons too. It is easy to produce, move paper money Economically and Humanly but it is also shorter in life.
Advantages of Paper Money
Paper Money is Economical
Currency Notes is economical in the sense that its face value is greater than intrinsic value. Cost of production is less than other forms of money. Like dollar note in USA is an example of Paper money.
Paper Money is More Elastic
Elastic means that its supply could be controlled easily. Government print more notes if there is higher demand and produce less if there is less demand. So, Government manages its production according to the requirement of an economy.
This kind of medium of exchange brings more price stability in an economy than other. Currency standard manage the mechanism of monetary policy. Price stability merit of paper currency reveals equality between its demand and supply.
Paper Money Free From Cyclical Fluctuations
In previous era cyclical fluctuations highly influenced the money standard especially gold. Cyclical fluctuations in business cycles transform from one country to another country which simultaneously influence the economy of trading partners. But after the evolution of paper currency this problem removed easily. While cyclical fluctuations do not influence the paper money.
Currency Notes has the characteristic of quick usability because it is legal tender money. This kind of medium of exchange has the characteristic of easy acceptability because each note issued against certain amount of foreign security and gold reserves.
Paper Money Count Quickly
In the era of metal, people consume more time in counting. But paper money facilitates people in this regard. Now people count large amounts in few minutes and save their time.
Easy to Move
People use paper currency because it is easily transferable from one place to another place. While in case of gold standard it was difficult to move from one place to another place. So, Paper Currency is easy to transfer.
In gold standard people faced difficulties regarding the money security and sometimes they kept their savings to other persons. Large amounts increased the fair of theft but invention of paper currency reduces all these perceptions. Paper money could be accumulating easily because people will never face the problem of debasement or theft.
In previous era of money standard people lose confidence due to the problem of coin debasement; this is mostly happened in gold standard. But in case of paper Money highly acknowledge due to the lack of debasement.
Demerits or Disadvantages of Paper Money
Brings More Inflation
Government prints new notes without keeping specific reserves in their valet’s. The excessive new notes printing increases the amount of money supply which further promotes inflation in an economy. This situation decreases the value of paper currency. While in case of gold standard there were less chances of inflation.
Unstable Exchange Rate
Another drawback of paper money is instability in exchange rate; wide fluctuations in external price against internal price negatively influence the international trade and domestic economic growth. Government adopt some polices to overcome such problems.
Lack of Long Lasting
This form of medium of exchange has faced the problem of durability because it can be destroy by insects and fire. While in case of gold standard people were easily stored it without any fear. So, currency notes lose the feature of long lasting.
Excessive amount printing new notes bring instability in the value of paper currency. These variations in paper money shattered the confidence of people and negatively influence business and economic growth.
Lack of Automation
Lack of automation is another drawback of paper money because it requires Government and monetary authority involvement. Without the interference of certain authorities that medium of exchange ruins the economy.
Paper currency considers unstable because Government can easily increases or decreases its supply through printing new notes while ignoring the specific reserve condition.