Question

advantages and disadvantages of modern money

Answer 1

Advantages of Money:

Paper money has got several advantages and disadvantages.

The following advantages can be mentioned:



(i) Economical:

Paper money practically costs nothing to the Govern­ment. Currency notes, therefore, are the cheapest media of exchange. If a country uses paper money, it need not spend anything on the purchase of gold or minting coins. The loss which a country suffers from the wear and tear of metallic money is also avoided.

(ii) Convenient:

Paper money is the most convenient form of money. A large amount can be carried conveniently in the pocket without anybody knowing it. It is very risky to carry on one’s person Rs. 5,000 in cash, but not in notes. It possesses, in a very large measure, the quality of portability which a money material should have. In a very small bulk, it can contain a very large value. Think of a currency note of Rs. 10,000.



(iii) Homogeneous:

One essential quality in money is that it must be exactly of the same type. Even among the coins there are good and bad coins. But currency notes are all exactly similar. It is, therefore, a very suitable medium of exchange.

(iv) Stability:

The value of paper money can be kept stable by properly regulating its issue. That is why there are many advocates of ‘managed’ paper currency.

(v) Elasticity:

Paper money is absolutely elastic. Its quantity can be increased or decreased at the will of the currency authority. Thus paper money can better meet the requirements of trade and industry.

(vi) Cheap Remittance:

Money in the form of currency notes can be cheaply remitted from one place to another in an insured cover.

(vii) Advantageous to Banks:



Paper money is of very great advantage to the banks. They can keep their cash reserves against liabilities in this form, for currency notes are full legal tender.

(viii) Fiscal advantages to the Government of the paper currency are undoubtedly very great, especially in times of national emergencies like a war. A modern war cannot be prosecuted by taxes or loans alone. All governments have to resort to the printing press. In recent years in India there has been great inflation. We must remember that by this means our Government has been able to spend hundreds of crores of rupees on various ambitious programmes of development. Hence within limits the issue of paper money comes very handy to the government at the time of dire need.

Disadvantages of Paper Money:

But we cannot overlook the disadvantages of money:

(i) Paper money is of no value outside the country of issue. Gold and silver coins are accepted even by foreigners, as they have got some intrinsic value.





(ii) There is a possibility of the damage to paper. Fire may burn it; if the place is flooded, it is gone; it may also be eaten up by white ants.

(iii) A serious drawback in paper currency is the ease with which it can be issued. There is always a danger of its over-issue when the Government is in financial difficulties. The temptation is too great to be resisted. Once this course is adopted, however, it gathers momentum and leads to further note-printing, and this goes on till the paper currency loses all value. This happened in various countries in recent times: in Russia (1917), in Germany (1919), in China (1944), and so on.

An over-issue of notes, in other words ‘inflation’, brings many evils in its train.

Some of them are:

(a) Prices rise steeply. As a result, labourers and people with fixed incomes suffer greatly. The whole public feels the pinch.

(b) The indirect result of the excessive rise in prices is a fall in exports and a rise in imports. This leads to the export of gold from the country, which is not a desirable thing. Its balance of payments becomes unfavorable.

(c) The rise in prices also leads to a fall in the external value of the home currency. The rate of exchange falls. More home money will have to be paid to buy units of foreign currencies.

Conclusion:

Really, paper money, if it is issued and regulated carefully, is without any disadvantage. All countries issue paper currency, and, in normal times, they do not suffer from it in any manner. Only when it is over-issued, it becomes a great danger and a curse. It may cause grave discontent among the masses. When paper money is over-issued, there is inflation and prices rise. It hits hard several important sections of the people like workers and fixed- encomiasts.

The people might lose confidence in the currency and it might become useless. Such a situation arose in many European countries during and after World War I, and later more recently in China. It is remarkable that Indian Government was able to control inflation, whereas even countries like the U.K. were unable to check it.

Answer 2

In a modern economy, the quantity of money in existence consists of

• Currency- coins
• Paper currency component
• Deposit money component

ADVANTAGES OF MODERN MONEY ARE-

• Paper money is economical as it is a reliable medium and the cost of supplying paper money is very cheap.
• It is very convenient to carry paper money
• It is also easy to store paper notes.
• The supply of paper money can be easily changed as per the needs of the economy.
• The use of money as a measure of value has simplified the problem of measuring the exchange values of various commodities in the market.

DISADVANTAGES OF MODERN MONEY ARE:-

• All paper currency is not convertible, that is it is not convertible to gold and silver.
• Modern money is legal tender which means that the individual is bound to accept it in exchange for commodities and services, it cannot be refused in the settlement of payments of any kind.
• In a modern economy, a large number of transactions involve payment in future which increases the risk of theft, fraud, corruption and crimes.

#SPJ2