There are following disadvantages of paper money:If you want to pay in cash, you have to put up with a few disadvantages. For example, paying in cash can be less practical than paying with a credit card, debit card or smartphone.
8 Disadvantages of Paper Money You Must Know
- Limited Acceptance:
The first demerit of paper money is that it has limited acceptance, because it is acceptable within the boundaries of home country. When we want to purchase something from abroad, we have to make payment in that form of currency accepted in seller’s country.
- Instability:
Paper money may create instability in foreign exchange rates when ‘ the domestic prices and external prices do not move proportionately. This event creates problems for domestic consumers.
- Damage to Paper Money:
Normally paper money has short life than metallic money. There are chances of damages to paper if used frequently and it may lose its good appearance, colour and shape due to fire or water. On the other hand, metallic money possesses a longer life and more durable than paper money under said circumstances.
- Danger of Over-issue:
It is the most prominent drawback of paper money that there is always a danger of its over-issue. Excessive issue of currency by the government to meet certain economic objectives can bring inflationary pressure. Consequently this inflation brings problems for the general public.
- Small Denomination:
Paper money is not suitable for small monetary denomination such as notes of rupee 1, 2, 5 and 10. In this case metallic money gets preference over paper money. The currency notes of 1, 2, 5 and 10 are not economical for the government.
- Balance of Payments:
Excessive issue of currency notes decreases its value. Moreover excessive issuance of currency causes to increase inflation. Due to which prices of imports increase as they are to be paid in exchange of devalued local currency.
- Demonetizations of Paper Money:
The paper money is fiat money. It is accepted by the order of government. In case the government cancels the notes, the holder of money bears full loss, as its sale value is nothing.
- Less Confidence:
As value of paper money is less stable and it has no real value in it so people have less confidence in paper money as compared to metallic money.