“Money is a good servant but a bad Master”. Explain.
To Explain the above statements, the advantages and disadvantages of paper money have to be evaluated.
Advantages of Money
The following advantages can be mentioned:
(1) 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.
(2) 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 possesses, the quality of portability which a money material should have. In a very small bulk, it can contain a very large value.
(3) 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.
(4) 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.
(5) Elasticity: Paper money is absolutely elastic. Its quantity can be increased or decreased at the will of the currency authority. Thus paper money can best meet the requirements of trade and industry.
(6) Cheap Remittance: Money in the form of currency notes can be cheaply remitted from one place to another in an insured cover.
(7) 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.
(8) Fiscal Advantages: 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 money. Hence within limits, the issue of paper money comes very handy to the government at the time of need. Disadvantages of Paper Money
Disadvantages of paper money are given in the following points:
(1) Paper money is of no value outside the country of issue. Gold and silver coins are accepted even by foreigners, as they have 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) and in China (1944).
An over-issue of notes, in other words ‘inflation’, brings many evils. 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 unfavourable.
(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 with limits, then it does not suffer from any demerits. 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 income groups.
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.
So, on the basis of the above discussion, it can be concluded that money is a good servant if it is regulated and kept under control but a bad master if it is allowed to have its way.
