Advantages of Paper Money

The people have become so accustomed to the use of paper money (without any backing in terms of any precocious metal) that perhaps they have not bothered to ask themselves, even for a brief moment, the reason for its use. Like gold and silver which are used as money, there are number of reasons behind its use.

In the first place, paper money is definitely easier to carry. Moreover, transactions involving the use of large sums of money would greatly inconvenience individuals concerned if they were to use coins instead of paper money.

Also, it is cheaper for the government to print paper money as compared to the minting of bullion into coins. Moreover, the volume of paper money can be contracted or expanded easily by the government in accordance with the changing needs of the economy.

The most forceful argument against the adoption of a fiat standard lies on the recognition that, since it does not have any direct link with the monetary standards of other countries, no precise relationship between the value of the domestic monetary unit and the value of foreign units exists as that which obtains when the various monetary units expressed in terms of gold. Accordingly, it is believed that exchange rates between nations are free to fluctuate without any limit whatsoever. Thus, to the minds of the critics, such a circumstances as mentioned above may possibly lead some governments to depreciate the external value of their currencies deliberately with the objective of obtaining desirable advantages in foreign markets. Such action, if observed, might precipitate a competitive depreciation among countries or may give rise to the adoption of numerous measures to control imports and exports, including tariffs,quotas, embargoes and similar trade restrictions.