Paper Money is defined as currency notes used as a medium of exchange and issued by the State Government. People consider currency notes as a kind of money that performs all the functions of a good medium of exchange.
Paper currency is convertible in the sense that it may convert into gold and precious metals while it may inconvertible because it is not exchangeable into coins.
Now a day’s, Like Credit Cards (a form of plastic money) paper money got more popular than other forms of money.
4 Types of Paper Money
- Representative Paper Money
- Convertible Paper Money
- Inconvertible Paper Money
- Fiat 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, and move paper money Economically and Humanly but it is also shorter in life.
|Advantages of Paper Money||Disadvantages of Paper Money|
|Stable Price||Shorter Life|
|Quickly Usable||No Automation|
Advantages of Paper Money
Paper Money is Economical
Currency Notes are economical in the sense that their face value is greater than their intrinsic value. The cost of production is less than other forms of money. Like dollar note in the USA is an example of Paper money.
Paper Money is More Elastic
Elastic means that its supply could be controlled easily. The government prints more note if there is higher demand and produces less if there is less demand. So, Government manages its production according to the requirement of the economy.
This kind of medium of exchange brings more price stability to an economy than in others. Currency standards manage the mechanism of monetary policy. The price stability merit of paper currency reveals equality between its demand and supply.
Paper Money Free From Cyclical Fluctuations
In the 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 influences the economy of trading partners. But after the evolution of paper currency, this problem was removed easily. While cyclical fluctuations do not influence paper money.
Currency Notes have 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 is issued against a certain amount of foreign security and gold reserves.
Paper Money Count Quickly
In the era of metal, people consume more time counting. But paper money facilitates people in this regard. Now people count large amounts in a few minutes and save time.
Easy to Move
People use paper currency because it is easily transferable from one place to another place. While in the case of the gold standard it was difficult to move from one place to another place. So, Paper Currency is easy to transfer.
In the gold standard, people faced difficulties regarding money security, and sometimes they kept their savings with other people. Large amounts increased the fair of theft but the 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 the previous eras of money, standard people lose confidence due to the problem of coin debasement; this mostly happened in the gold standard. But in the case of paper Money highly acknowledge due to the lack of debasement.
Demerits or Disadvantages of Paper Money
Brings More Inflation
The government prints new notes without keeping specific reserves in their valets. Excessive new note printing increases the amount of money supply which further promotes inflation in an economy. This situation decreases the value of the paper currency. While in the case of the gold standard there were fewer chances of inflation.
Unstable Exchange Rate
Another drawback of paper money is instability in the exchange rate; wide fluctuations in external price against internal price negatively influence international trade and domestic economic growth. Government adopts some policies to overcome such problems.
Lack of Long Lasting
This form of medium of exchange has faced the problem of durability because it can be destroyed by insects and fire. While in the case of the gold standard people easily stored it without any fear. So, currency notes lose the feature of being long-lasting.
Excessive amounts of printing new notes bring instability to the value of the paper currency. These variations in paper money shattered the confidence of people and negatively influence business and economic growth.
Lack of Automation
The 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 by printing new notes while ignoring the specific reserve condition.
Lisa is a passionate travelers. She spends 3 months every year visiting different places worldwide. She has visited almost every famous place in the world. She herself is an affiliate blogger