Merits and demerits of Paper standard of Money

 MERITS

(1) ECONOMICAL:- Since under paper standard no gold coins are in circulation and no gold reserves are required to back paper notes, it is the most economical form of monetary standard. Even the poor countries can adopt it without any difficulty.

(2) PROPER USE OF GOLD:- Wastage of gold is avoided and this precious metal becomes available for industrial, art and ornamental purpose.

(3) ELASTIC MONEY SUPPLY:- Since paper money is not linked with any metal, the government or the monetary authority can easily change the money supply to meet the demand.

(4) ENSURES FULL EMPLOYMENT AND ECONOMIC GROWTH:- Under this system, government is free to determine the monetary policy. It regulates the money in such a way that ensures full employment of the productive resources and promotes economic growth.

(5) AVOIDS DEFLATION:- Under this system, a country avoids deflationary fall in prices and incomes which is the direct consequence of gold export.

(6) USEFUL DURING EMERGENCY:- This system is very useful in times of war when large funds are needed. It is also best suited to the less developed countries like India in times of deficit financing.

(7) INTERNAL PRICE STABILITY:- Under this system, the monetary authority of a country can establish stability in the domestic price level by regulating money supply in accordance with the changing requirements of the economy.

(8) REGULATION OF EXCHANGE RATE:- This system provides more effective and automatic regulation of exchange rate. Whenever there is disequilibrium, it allows demand and supply to operate freely to establish equilibrium.


DEMERITS

(1) EXCHANGE INSTABILITY:- Since the currency has no link with any metal under paper currency, there are wide fluctuations in the foreign exchange rate. This adversely affect the international trade. Exchange instability arises whenever external prices move more than domestic price.

(2) INTERNAL PRICE INSTABILITY:- Even the commonly claimed advantage of paper standard, i.e., domestic price stability, may not be achieved in reality. Infact the countries now on paper standard experience such violent fluctuations in internal prices as they experienced under gold standard before.

(3) DANGERS OF INFLATION:- Paper standard has a definite bias towards inflation because there is always a possibility of over issue of currency. The government here has a tendency to use managed currency to cover up its budget deficit. This results in inflationary rise in prices with all its evil effects.

(4) DANGER OF MISMANAGEMENT:- Paper standard can serve the country only if it is properly and efficiently managed. Even the minor mistake can bring disastrous results. If the government issues little more or little less currency than what is required, it may lead to cumulative inflation or cumulative deflation.

(5) LIMITED FREEDOM:- In the present world of economic dependence, it is almost impossible for a particular country to isolate itself and remain unaffected from the international economic fluctuations simply by adopting paper standard.

(6) ABSENCE OF AUTOMATIC WORKING:- The paper standard does not work automatically. To make it work properly, the government has to interfere from time to time.

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