Question

Distinguish between convertible paper money and inconvertible paper money.

Answer 1

Distinguishing factors between convertible paper money and inconvertible paper money are as follows:

• In case of convertible paper money, into another currency money can be converted in a quick manner. Gold, silver can use in exchange of convertible currency. At demand of holder,this can be converted into cash.

• Inconvertible money is that currency cannot be converted into another type of money. It cannot be converted into metallic coins on holder's demand.

Answer 2

Difference between convertible paper money and in-convertible paper money:

Convertible Paper Money:

• The second method of issuing paper money is a convertible paper currency. Convertibility refers to the guarantee of converting paper notes into standard coins or precious metals.
• Representative paper currency is, of course, convertible. But, convertible paper currency need not be representative.
• This is because people believe they can get their paper money converted into gold and silver any time they want, but actually, in practice, hardly anybody would present paper currency for conversion.

In-convertible paper money:

• When the conversion of paper-currency into the precious metals is not guaranteed, the currency becomes in-convertible paper currency.
• As a basis for this currency, a stock of precious metal can be kept. But it is not necessary to keep any reserves.
• The reserves are kept for winning public confidence. In the absence of any reserves, the paper money becomes fiat money.

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