Paper Money

PAPER MONEY

Man has used variety of commodities as a medium of exchange. The Barter system was replaced by commodity money. The next evolution of money was the use of precious metals like gold and sliver. With the growth of trade and commerce activities, efforts were made to find out a superior kind of monetary medium. Paper money was then discovered to be the most suitable medium of exchange for all transactions.

Paper money refers to the currency notes issued by the state or central bank. In Pakistan, 1, 2, 5, rupee coins issued by the government where as other currency notes (10, 50, 100, 500, WOO) are issued by the State Bank of Pakistan. In all countries of the world paper money is widely accepted as a medium of exchange because it is legal tender and people are legally bound to accept it. China is the originator of paper money. (Paper money was introduced in china in ninth century.) Now, in almost all the countries of the world the inconvertible paper money is used as a medium of exchange and standard of value because it is legal tender.

Definition:-        
L F. E. PERRY

"Paper money is a document representing money, such as bank notes promissory
notes, bill of exchange or postal orders.    

2. PROF. HANSON:

"Paper money means the paper instruments such as bank notes, cheques, bill and other forms which take the place of money and act as a currency or circulation medium. "

3. PROF. GREENER:         

"Paper money means a document with a value stated on it but no value in it (like coins). "

KINDS OF PAPERS MONEY

1. Convertible Paper Money

Convertible paper money is that form of money that carries a promise of issuing authority that it can be converted into the standard metal money on demand. The standard of money metal consists of full-bodied coins of metal made of gold and silver is called as redeemable paper money. The total supply of convertible papery is fully backed by the standard metal money and is called covered issue.

2. Inconvertible Paper Money

The inconvertible paper money is that money, which is not backed by any metallic reserve and cannot be converted into standard money metal at the option of holder. The people accept inconvertible paper in the exchange of goods and services as it is regulated by the state on the state authority.

The paper money has certain advantages in its uses as a medium of exchange store of value, standard of value and standard of deferred payment.

ADVANTAGES:

1.  Easy portability

The transfer of paper money from one place to another is easy and cheaper than metallic money. Paper money has a high value and less weight and small bulk, as it is easily portable even for carrying out large transactions.

2.  Easy Handling

The paper money is widely accepted as a medium of exchange and standard of value due to easy handling. It is easy to count, keep and deliver.

3.   Uniformity

The paper money has another advantage that it is uniform in size, color, material, shape etc. The holder least bothers for possession of new or old money. The holder least bothers for possession of new or old money. Further there is no ambiguity in it.

4. Flexibility

Paper money is flexible and it can be easily molded, folded and converted in any size and shape.  So it becomes easy to put into pocket, bag or any other place.

5.  Elasticity

Paper money is elastic in nature.   Its supply can easily expand in accordance with the money needs of the country.    The volume of money can be increased or decreased

according to the requirement.

6.  Economical

Paper money is very economical regarding its material printing and wear and tear. We can bring very large quantity of paper money in the market on a very little cost. Moreover its printing is very easy and less time consuming as compared to metallic money.

7. No Loss of Metal

Loss of wear and tear of repeated use of coins made of precious metal .is saved with the use of paper money. Paper money can be used for many years and has no loss of value.

8. Less chance of Imitation

There are very less chance of fraud or imitation due to unique raw material paper money. Beside it is printed and styled in a very technical method.

9.  Cognizability

i The paper money is easily recognizable.    The holder is now saved from the tension of testing the geniuses of the money material.

10. Storability

Paper money possesses the quality of storability. Wealth can be stored in the form of paper money for a long period of time without loss of its value.

11. Divisibility

Paper money is divisible. It can be divided into the smaller money units. Without losing its value. 1000 rupees note can be divided into a thousand or even more parts without losing it value.

12. Easy counting

It is more convenient to count notes than coins. The counting and the arrangement of notes take less time as compared metal coins. Billions of notes can be counted in very short time.

13. Low Expenses

The printing of paper money is cheaper than metallic money. Minting is lengthy and costly process. Minting, refining and minting of coins cost many times more than printing of paper money. The raw material of paper money is cheaper and easily available.

14. Emergency Needs of Government

Paper money helps the government in time of emergency such as war and floods. The Government can raise necessary funds by issuing notes to tide   over emergencies. Paper money sometime can be printed even without reserves.  But in case metallic money coins cannot be minted without reserves.  But in case of metallic money coins cannot be minted without gold or silver.

15. Deficit Financing

Filling the gap between less income and more expenditure by borrowing or printing notes without any reserve is deficit financing. It must be utilized skillfully, if deficit financing is used efficiently then it is beneficial, otherwise it results in economic disasters.

DISADVANTAGES:

1. Less Durable:

The paper lacks the essential quality of durability of money. It can be easily destroyed by the fire, water etc. It is not durable on the other hand metallic money is ling lasting and durable.

2. Less Stable Value:

The value of paper money is less stable as compared to the metallic money as paper money is not fully backed. Sometimes it is issued without keeping any reserve in form of gold or silver. Paper money is elastic it can be increased or decreased. The value of money rests upon the quantity of money and fluctuates with the quantity of money.

3. Small Denomination:

Paper is not suitable for all denominations (values) of money. For amount of so small as 1,2,5, rupees paper is less satisfactory than metallic money.

4. Limited Acceptability:

The acceptability of paper money is limited. It can circulate, as money in a limited and narrow area than metallic money. Paper money is normally acceptable only within the boundaries of a country because it has no real value as metallic money had.

5. Value Precarious:

The value of paper money is very precarious although its value falls when there is a rising price level in the country. In case the government demonetizes or cancel it, the holder will have worthless pieces of paper in his possession.

6. Fluctuation in Foreign Exchange:

In case of paper money there is no stability of exchange value of currencies of the various countries. The devaluation of currency of one country up0sets the foreign exchange rates of all other.

7. Less Confidence:

As value of paper money is less stable and it has no real value in it so people have less confidence in paper money as compared to metallic money.

8. Loss and Theft:

Paper money has also problem of lost and theft. It can be easily lost or stolen.

9.  Chances of Over or Under Issue

It is so tempting and easy to print paper notes. The increase in money supply unmatched by production causes inflation or deflation. The price level goes up and value of money goes down in case of over issue. In the same way, under issue of money also creates many problems.