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Merits And Demerits Of Paper Money

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Mar 12th, 2011
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Merits of Paper Money
The paper money claims the following advantages

(1)    Economical
Under paper standard the central bank has not to keep gold or silver for issuing of the paper notes. The cost of printing paper notes is also very small. It is thus most economical form of monetary standard

(2)    Elasticity of money supply
As the money supply is not backed with gold or silver therefore the monetary authority can easily manage its supply according to the requirements of trade and industry in the country

(3)    Promotes economic growth
Under paper standard the monetary authority is free to determine its monetary policy. It therefore regulates the money supply in such a way that productive resources of the country are utilized to their maximum and greater economic growth achieved.

(4)    Internal price stability
Under paper standard the monetary authority can maintain stability in internal price level by making necessary expansion or contraction in money supply according to the economic conditions.

(5)    Helpful in emergency
Paper money is also useful in times of war. When huge funds are needed to finance it. It is also helpful to meet any financial crisis. The monetary authority by expanding or contracting the money supply achieves this objective.

(6)    Regulation of exchange rates
Under paper standard the international exchange rates are fixed by purchasing power of the respective countries Paper currency is an effective and automatic regulator of exchange rates between the countries.

(7)    Uniform quality
The paper money has another advantage that it has a uniform quality and the holder least bothers for possession of new money coins. With the use of paper money the loss of precious metals due to wear and tear is also solved.

Demerits of Paper Standard
The demerits of paper money are also worth noting. They in brief are as under:

(1)    Danger of inflation
Under paper money the increase in money supply is not difficult because it requires no backing of gold or silver. The government of the country under the cover of deficit financing over issues paper currency. This results in inflationary rise in prices with all its evil effects.

(2)    Internal price instability
All the countries of the world are now on paper standard. They have not achieved domestic price stability in reality. There are violent fluctuations in internal prices under this system.

(3)    Exchange instability
Under paper standard there are also wide fluctuations in the foreign exchange rates. The internal prices do not move in line with the external prices As such external instability arises which directly effects the foreign trade.

(4)    Dangers of mismanagement
Paper standard is useful only when it is efficiently managed. If the monetary authority is not vigilant and does not issue the paper currency as required it often leads to inflation or deflation.

(5)    Fear of demonetization
The paper money has no intrinsic value of its own The monetary authority also does not promise to convert it into precious metal If the government at any time orders the demonetization of the currency the paper notes cease to be the legal tender in the country If the holders of the demonetized notes fail to deposit these notes in time they have then no value.

(6)    Use within the country
As the intrinsic value of paper money is zero they can only be used in the country issuing outside the country only stable paper money has the value.

Conclusion. Paper money is a source of blessing for mankind However, when it is not properly managed; it becomes source of peril and confusion.

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