Paper Money:
Paper money is the most advanced form of money. It fulfils almost all the qualities of good money, as it is economical, easily recognizable, portable and storable. Paper money can be classified into representative, convertible and fiat money. Now a days almost majority of paper currency is fiat money. Different authors have defined paper money in the following words.
In words of Hanson:
Paper money means the paper instruments such as bank notes, cheques, bills of exchange and other forms that take the place of money and act as currency or circulating medium.
In words of F.Perry:
Paper money is documents representing money, such as bank note, promissory notes, bills of exchange or postal orders.
In words of M.Greener:
Paper money means documents with a value stated on them but having no value in them.
Merits of Paper Money
1. Cheap and Economical
Normally paper money is much easier to issue. Practically it cost nothing to government. Printing of paper currency is requires certain special types of paper, ink, and printing technology. These things no doubt are costly but overall printing cost is quite low.
2. Convenience
Paper money is convenient to transfer and carry. It can be easily kept in pocket. Further it can also be readily converted into cheques, drafts, etc.
3. Copying
The design of paper money is very difficult to copy. Further special type of paper and ink is used in paper money that makes it quite impossible to copy. Even if it copied by some fake means then it can be checked by electronic machines.
4. Homogeneous (Uniform quality)
The paper money has another advantage that it has uniform quality and the holder does not bother for possession of new or old money.
5. Elastic Supply
Paper money due to its elasticity is very useful for government. Supply of money can be increased or decreased according to the needs of the economy. For example at a peak level of business activity the demand of money increases and the monetary authorities can easily issue paper money to fulfill the demand of money.
6. Advantage of Unlimited Legal Tender
Paper money is unlimited tender i.e any amount of payment or of debt can be paid in it. It can be used to discharge all kinds of business obligations.
7. Precious Metals Saving
Use of paper money results the saving of precious metals of the country. The metals can be used for other useful purposes.
8. Ease of Counting
Paper money is much easer to count than metallic money. The counting of large amounts in metal form is inconvenient and difficult. On the other hand counting of paper money is easy, convenient and requires little time.
9. Recognizable
The paper money is easily recognizable. There is no inconvenience of testing the exactness of the money material.
10. Useful in Emergency
The paper money can be used in emergency life war and floods. The government can meet the expenses by printing notes in shorter time. But metallic money takes long time period for mining, refining and minting the metals.
11. Stable in Value
The metallic money depreciates due to wear and tear. The paper money helps to control such loss. The depreciation means decrease in the value of coins due to usage.
12. Easily Portable
Paper money is portable i.e. it can easily be transferred from one place to another as compared to metallic money. The cost of transferring paper money is quite low and it can be transferred in a very short time period.
Demerits of Paper Money
1. Demonetization
The demerit of paper money is that the holder may have to suffer loss. The paper money is fiat money. It is issued by fiat(order) of the government. In case the government cancels the currency notes the holder has to bear full loss.
2. Exchange Rate Instability
The value of paper money is instable and is subject to fluctuations in the exchange rates. The fluctuations in the exchange rate market also produce serious effects on the price level in the economy.
3. Monetary Mismanagement
Purchasing power of paper money is an ever – changing process. This means that its face value remains same but its purchasing power may decline due to monetary mismanagement.
4. Excess Issuance
The printing of paper money is quite easy, so in times of need the government can issue notes more than the requirement. As a result supply of money increases that causes inflation in the economy.
5. Restricted Acceptability (Limited Acceptance)
One of the demerits of paper money is that it has limited acceptance. Its acceptance is limited within the boundaries of a country. It cannot be used to make payments to other countries.
6. Inconvenience of Small Denominators
Paper issue is not for small monetary denominators such as 1,10,25,50 paisa and even for Rs. 1,2 and 5. In this case metallic money gets preference over paper money.
7. Troubling Balance of Payments
Over issue of money results in decrease of value of money and also causes inflation. Due to which price of imported goods increases because they are to be paid by exchanging devalued currency for foreign currency. It results in unfavorable balance of payment.
8. Short Life
Although the paper currency is not affected by wear and tear but it can be damaged due to fire or water. Due to this the life of the paper currency is much less than the metallic money.