What is Paper Money in Economics
Paper Money in Economics
Paper money means the currency notes issued by central bank of country. In the present age paper money has got a significant place in place of metallic money. Paper money is convenient to carry and easy to handle and store. It is the most advance form of money. It fulfills nearly all the characteristics of ideal money. It is believed that different attempts are make or introduce paper money i.e. In China during 9th century, Iran 13 th century and finally paper money was originated by gold smith of England in early 17th century. Now in all developed and underdeveloped countries of world, Inconvertible paper money is used as medium of exchange and standard of value.
“Paper money means the paper instruments such as bank notes, cheque, bills and other forms which act as a currency”.
ACCORDING TO F. PERRY
“Paper money is document representing money such as bank notes, promissory notes, bills of exchange etc”.
ACCORDING TO PROF. GREENER
“Paper money means documents with a value started on them but having no value in them”.
KINDS OF PAPER MONEY:
Paper money is classified into following kinds:-
Representative paper money. Convertible paper money. Inconvertible paper money. Fiat paper money
REPRESENTATIVE PAPER MONEY
Representative paper money is one which is fully state is in a position to convert all the not s into gold, If they are presented for conversion at the same time. The govt keeps reserves for the confidence of peop e. In USA before 1934 the notes were issued on this principle. The example of this is American gold and silver certificates.
CONVERTIBEL PAPER MONEY
It is such a form of money which can be converted into gold and metallic reserves, but not all the notes issued by the state are fully backed by Govt. No need to keep 100% gold reserves as compare to representative paper money.
INCONVERTIBLE PAPER MONEY
Inconvertible paper money cannot be exchange or converted into gold. The gold or silver reserves are not kept by the monitory authority. The money is issued on the written promise of the government. This paper money can cause over issue of notes.
FAIT PAPER MONEY
Fait money is the form of inconvertible money having little or no value in it. Fait means the order of government. Fait money is accepted by the people for purchase or exchange of goods, due to government order. Paper money is fait money. Whenever government cancels any notes, the holder will lose the whole value.
ADVANTAGES OF PAPER MONEY ECONOMICAL
Paper money is normally much easy to issue. The cost of currency as compared to its face value is very low. The central bank has not to keep gold or silver for issuing of the paper notes.
UNLIMITED LEGAL TENDER
Paper currency is unlimited legal tender money. I.e. any amount of debt can be paid in it. It can be used to discharge all kinds of business obligations and liabilities. No one fuse to accept in settlement of any debt.
The paper money has less we ght then metallic money. It is easy to handle then metallic money.
Paper money due to its elasticity is very useful for the government. It can be increased or decreased according to business requirement.
The paper money is convenient to carry and transfer. It can be easily kept in pocket or wallet.
DIFFICULT TO COPY
The design of paper currency is very intricate and special type of ink and paper is used hence it is difficult to copy it.
Paper currency is always numbered. Each one has a distinct number. So in case of robbery, bank fraud, the involved person can be traced out when. They use the embezzled money.
The paper money is easily recognizable. There is no botheration of testing the genuineness of the money material.
Paper currency is easily convertible into other. Credit instruments such as draft, promissory note and bills etc.
USEFUL IN EMERGENCY
The paper money can be used in emergency like war and floods. The government can meet the expenses by printing notes in short period.
SAVING IN USE OF METAL
Paper currency indirectly leads to the saving in the metallic reserves of the country. Due to the issuance of paper currency there is no need to issue coins in greater value.
HIGH VALUE IN SMALL BULK
Paper money has the quality that it has value in small quantity or bulk.
The paper money stays uniform. The apparent loss of colour or tearing of paper does not affect the value. It is uniform in colour, size, design, weight etc.
It is easier and less expensive to make payment in thousand of rupees through paper money.
ADVANTAGES TO BANK
Paper money is of great advantage to banks. They can keep cash reserves in this form.
The present state of international trade also owes great to paper currency. Different type of paper money can be conveniently interred changed and used in different parts of world. This has increased the liquidity of world’s economy.
Our market forces of demand and supply works because of price mechanism. Paper money has greatly help in making price mechanism workable and effective.
As the supply of paper money can be regulated by central bank so, monetary management becomes easy. The volume of circulation of money central bank.
Disadvantages of paper money Limited Acceptance
Demerit of paper money is that it has a limited acceptance. Its acceptance is limited with in the boundaries of home cont ray. It is not legal tender money in other countries.
Danger of inflation
The biggest demerit is that paper money is over issued then it brings inflation in the country which is harmful for purchasing power.
Lack of durability
Normally paper money has a short life than metallic money. There are chances of damages to paper. Fire may burn it. Paper money loses its good appearance and shape.
Paper money is not suitable for small monetary denominations such as 1, 2, 5, 10, 25, and 50 paisa. In this case metallic money gets preference over paper money.
Balance of payment
When paper money over issued in the market then it cause the inflation, and in which prices will be higher on the other hand value of money decrease and balance of payment becoming unfavorable day to day with the affect of inflation.
There is less stability in the value of the paper money as compared to metallic money. Some time it is over issued and people lose confidence in the value of money and they prefer to keep their savings in terms of gold and silver.
Loss due to fire and water
Although the paper money is not affected by and apparent wear and tear or loss of colour yet it can be damaged due to fire or water.
DANGER OF MISMANAGEMENT
Paper money 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 deflation.
Paper money has given rise to wide scale price fluctuation in different countries of world. The fluctuations in exchange rate market also produce serious effects on the general price level in the economy. Weak paper money fails to enjoy. The confidence of the people and cause price instability.
From above discussion we concluded that paper money has also some defects. It is better than metals and it is also helpful for removing the economic problems. It is a source of blessing for mankind. However when it is not properly managed it becomes source of perils & confidence.
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