Q: What is Paper money? What are its advantages and disadvantages?



The term paper money is used for the currency notes issued by the central bank or government of a country use of paper money has become wide due to its convenience as a medium of exchange.

Definitions of Paper money

According to F.E.Perrv: –

‘Taper money are documents representing money, such as bank notes, promissory notes, bills of exchange or postal orders.”

According to D.G. Hanson:

“Paper money means the paper instruments such as bank notes, cheques, bills and other forms which take the place of money and acts as a currency or circulating medium.”


Paper money is classified into following four types.

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Representative Paper Money

Convertible Paper Money

Inconvertible Paper money

  1. Representative Paper Monev:

Representative paper money is that money, which has hundred percent metallic reserves behind it. Such money, can be exchanged for gold coins.

  1. Convertible Paper Money:

Paper money, which is convertible into gold or silver on demand, is called convertible paper money.

  1. Unconvertible Paper Monev:

Unconvertible paper money is that which is not converted into gold or silver on demand Central bank has to keep a certain percentage of gold or silver or foreign exchange against issue of such money.

  1. Fiat Monev: –

Fiat money is inconvertible money, having little or no value in it. People accept this money due to govt. order.




Advantages to


Better Use

Easily Recognized

Easy in Counting



Loss is controlled


Saving of precious



Uniform Quality

Useful in wars and



o    Danger of Inflation o    Demonetizations of

Paper money o   Difficulty in foreign

payments o    Short Life o   Fake Money o    Lack of Durability o    Less Stability o   Limited Circulation o   Restricted


Advantages of Paper Money

jiftg are the advantages of paper money.

.   Advantages to Bank: – Paper money is of great advantages to banks keep their cash reserves against liabilities.


  1. Better use: – The Paper helps to use the reserves for better productive purposes. The benefit of this money is available to the whole nation,
  2. Easily recognizable: – Paper money is easily recognizable by every body.
  3. Easy in counting: -Paper money can be counted more easily than coins, whereas the counting of metallic coins is a very difficult job.
  4. Economical: -The printing of paper money is very quick, cheap and economical as compared to minting metallic money.
  5. Elasticity: -The volume of paper money can be easily expended or contracted according to the needs of the country whereas the supply of metallic money is inelastic
  6. Loss is controlled: – The metallic money depreciates due to wear and tear paper mone} helps to control such loss.
  7. Portability: -Paper money can be easily transferred from one place to another so it is preferred over metallic money.

‘9.   Saving of precious metals: -With the use of paper money the precious metals like gold or silver are saved and these precious metals can be used to other productive purposes.

  1. Stability: – The value of paper money is more stable than metallic money. The proper management of paper money provides stability to price level in the country.

‘ 11. Uniform Quality: – Paper money has a uniform quality and holder of paper money least bother for possession of new or old money.

  1. Useful in wars and emergencies: – Paper money is very useful in wars and emergencies because govt. can meet its expenses by printing new notes in short period.

Disadvantages of Paper money: –

Following are the disadvantages of paper money.

Danger of Inflation: – A serious defect in paper money is that there is al i^s over issue. Generally less developed countries make deficit budget and over issuance of paper money which causes inflation.

  1. Demonetization of paper money: – In case of demonetization of paper money, as has f V been done in Pakistan in 1971. those who could not deposit the demonetized paper money due to certain reasons had to loss all the value.


  1. Difficulty in foreign pa\7ments: – Paper money does not help much outside the country •of issue. This cause difficulty in making foreign payments. –
  2. Fake money: – Due to paper money people try to make fake money. If full bodied coins are in circulation, there will be no temptation to make fake coins.
  3. Lack of durability;: – Paper money is not durable because it can easily be damaged and destroyed. In this way it lose its value.
  4. Less Stability: – There is less stability in value of paper money as compared to metallic money. Sometimes, it is over issued and people lose confidence in the value of money.
  5. Limited circulation: – The paper money is used within one country so it has limited circulation.
  6. Restricted acceptability: – The acceptance of paper money is restricted upto a certain country only, because people of other countries do not accept it at the time of payment.
  7. Short life: – Paper money is less durable than metallic money because the life of paper money is six months, whereas the life of a coin is sixty years.



In the end we may conclude that paper money is a great boon to mankind provided its issue is properly regulated and controlled.

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