What are the important merits and demerits of Paper Money ?


Paper money formed the next stage in the evolution of money. It was introduced in the 17th and 18th centuries and has now become the most popular form of money.

Initially, due to the safety problem of carrying costlier metals, like gold and silver, from one place to another, the merchants used to carry paper receipts against metallic money. With the passage of time, the scarcity of metals led the state authorities to introduce convertible paper currency; paper money was convertible into metals. In the later stages, however, paper money developed into flat money or inconvertible legal tender; paper money was not convertible into metals.

What are the merits of Paper Money

The following are the advantages of paper money:


(i) It is economical. Paper is much cheaper than any other metal.

(ii) It economises the use of valuable metals, like gold and silver.

(iii) There is no depreciation of metals in system 6f paper money.

(iv) It is convenient to carry paper money from one place to the other.


(v) It is easy to store large amounts of paper money in a small vault.

(vi) It can be easily replaced.

(vii) Changes in the supply of money can be easily made in accordance with the requirements of the economy.

What are the demerits of Paper Money:

Paper money also has some disadvantages:


i. There is always the danger of over-issue of currency notes because the changes in money supply can be made at the will of the government. Over-issue of paper currency results in inflationary situation in the country.

ii. Paper money lacks public confidence because mostly it is not backed by metallic reserves.

iii. Paper money is less durable than metallic money.

iv. Paper money is acceptable only within the domestic economy, and not for making foreign exchange payments.


v. Since the supply of paper money is liable to quick changes, there is lack of stability in its value.

vi. Fluctuations in the value of paper money generates an atmosphere of uncertainty in the economy which, in turn, promotes speculative activities.

vii. Paper money has no intrinsic value of its own. Thus, when paper money is demonetized, its value falls to zero.


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