Paper Currency

Paper Currency

Paper currency is the most advanced form of money. It fulfills nearly all the characteristics of an. ideal money. It is economical, easily recognizable, stable and conveniently storagable.

Paper currency (as already explained previously) can be classified , into representative, convertible and fiat money.

Now a days almost majority of the paper currency is fiat money.. In words of Keynes:

"Fiat money is one which _ts created and issued by state but is hot convertible by law into anything other than itself and has no fixed value in terms of an objective standard."

Other definitions of the paper currency are as follows: 'According to Hanson:

"Paper money means the paper instruments sucri as bank notes, cheques, bills, and other forms which act as a currency"

According to F. Perry:

"Paper money js a document representing money such as bank notes, promissory notes, bills of exchange, etc"

Thus paper currency is inconvertible but at the same time it is unlimited legal tender. Following are the advantages and disadvantages of paper currency.

Advantages: 1.      Economical:

Paper currency is' very economical to issue. The cost of currency as compared to its face value is, very low. Printing of paper currency requires certain special type of paper, ink and printing technology. These things are no doubt costly but the overall cost of printing paper currency is quite low.

2.       Unlimited Legal Tender:

Paper currency is unlimited legal leader any amount of debt can be paid in it.
It can be used to discharge all kinds of business obligations and liabilities. No one can
refuse to accept it in settlement of any debt.          

3.     Elasticity in Supply:

'The supply of paper currency' is elastic. It can bt increased or decreased according to monetary situation. It gives an ease of control to central authority over monetary matters. In times of need the central bank can print more notes, to stimulate the economy. •On the other hand during inflationary cycles the central bank can reduce the supply of currency and credit to check general price level.

4.      Convenience:

The paper currency is convenient to carry and transfer. It can be easily kept in pocket or~wallets. Further it can also be readily converted into cheques, drafts, TC's etc. Further it can also be transferred over long distances in no time.

o.       Difficulty to Copy:

The design of paper currency is very intricate and special type'of paper and ink is used hence it is impossible to copy it. Even if it is copied by some fake means then also it can be checked by some electronic machines.

6.       Uniformity:

The paper currency stays uniform. The apparent loss of color or tearing of paper does not effect the face value. It can be used many times by different people without any loss of value or damage. The writings on it or any other marks also do not effect its validity.

7.       Growth & Development:

The present era of economic-prosperity and development :owies great to the paper currency. Paper currency is at the base of world's vast economy. It has given new meanings ta exchange .and trade. The brisk'trading of today's world is possible because of rapid.means of payments and receipts. Paper currency has also helped the banks arid financial houses to flourish rapidly. It is also the root for development of numerous other paper credit instruments such as drafts, cheques etc.

8.       Price Mechanism:

Our market forces of demand and supply works because of the price mechanism. Paper currency has greatly helped in making price mechanism Workable and effective.

9.       International Trade:

The .present state of international trade also owes great to paper, currency. Different paper currencies can be conveniently interchanged and used indifferent parts of world! This has increased ,'tbe liquidity of world's economy. Moreover it has greatly contributed to increase fdrejgn trading in all the regions of the world.

10.     Monetary Management:

As the supply of paper currency can be regulated by central bank, thus monel management becomes easy. The volume of currency in circulation can be easily k under observation by the Central Bank. The Central Bank can use its monetary powers influence the supply of currency and credit in the economy.

11.     Record:

Paper currency is always numbered. Each note has a distinct number. So, in C£
of a robbery or bank frauds, the involved people can be traced out when they use I
embezzled money.                                                     _t

12.     Ease of Counting:

The paper money can be easily counted and piled up in bundles. It can be count) either manually or by specialized currency counting machines.* These machines can al; detect any fake currency note while counting.

13.     Convertibility:

Paper currency is easily convertible into¹ other credit instruments such as draft promissory notes, bills etc

14.     Saving in the 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 grate value. Thus metal is saved and can be used for other more useful purposes.

15.     Ease of Issuance:

The paper currency is easy to issue and administer. There are different methods for the issuance of paper currency which can be altered to meet the typical requirements of any economy. The method of issuance can also be changed in response to changes in the pattern of economy.

Disadvantages: 1..      inflation:

The major disadvantages of paper currency is -that it is exposed to inflation. The
• face value remains unchanged but the purchasing power declines. This has made people
suspicious about its validity. The problem of inflation is mainly faced by under developed-
countries,,In such countries people try to hold¹ savings in the form of foreign currencies
just as we people cherish to hold dollars. This further leads to business of speculation in
the economy. People try to make easy money by taking advantage of the fluctuations in
the exchange rates