Merits of Paper Money

The merits of the issue of government paper money are: It is economical, since it substitutes a less expensive material than metal for money and conserves the metal for the arts. It is easily and quickly increased; the printing press is more expeditious than the mine, smelter, and mint. It has fiscal advantages; in emergencies, before taxes can be laid or bonds sold, paper money may be run off in anticipation of taxes or receipts from sales of bonds; it can be used to pay the obligations of the state, and amounts to a forced loan without interest.

It is more convenient than metallic money; it is light in weight and the weight does not increase with the amount; it is easy to conceal and to ship by mail or express. If Properly Issued, It Provides Certain Elasticity To The Currency.

Demerits of Paper Money

Paper money has also many demerits and attendant evils:

The greatest has been pointed out - the high probability of over issue, with consequent disturbance of contracts, business morale and relationships, and foreign exchanges. The government may also suffer; it is a heavy purchaser, especially at such times as free resort is likely to be made to inconvertible issues, and it pays, like individuals, the higher prices due to inflation; the government expenditures are increased and the purchasing power of its receipts decreased, and as a net result the public debt is expanded.

The area of circulation of paper money is very limited; gold will be accepted internationally but paper only in the country issuing it; it cannot be used in international settlements. Its value, therefore, depends on the accidents of a limited area, and is more subject to fluctuation than that of gold, which is steadied by the equalizing tendencies of parts of a broad area.

Paper money has less stability of value, also, for the reason that it has only one use, namely, its monetary use. The metals, on the other hand have an equal or greater use in the arts, for which the demand is relatively constant, inasmuch as social usages change slowly and the demand for silver or gold utensils shifts but little. The total demand for the metal is, therefore, on a wider basis than the demand for paper money, and its value is thereby stabilized.

References

This section is from the book "Banking Principles And Practice", by Ray B. Westerfield

Assignment Title:
Merits and Demerits of Paper Money Assignment no 1 Submitted To: Maam Ayesha Saleem Subject Title: Money and Banking Date of Submitting: 13TH May,2009 Submitted By: Irfan Ghafoor Roll No 230 BBA (hons) 6th Semester Department of Management Sciences

GC University Faisalabad