In a broad definition, paper money is paper with a specific nominal value that functions as money even though, sometimes, it is not a legal tender. Examples are banknotes, bills of exchange, promissory notes, and checks.
In a narrow definition, it only includes legal tender in the form of banknotes. It is the official paper currency of a country and can be used as a means of payment in goods and services transactions. The monetary authority or central bank regulates its printing and supply as one of the instruments of monetary policy.
A brief history of paper money
The use of paper money originated in China during the Tang Dynasty, which ruled between 618 and 907. The dynasty used this currency for a long time before its use spread to other countries.
In the 1700s, paper money began to develop in Europe. At that time, the official bank of the French government began issuing paper that acted as money. The idea came from goldsmiths, who gave people receipts for the gold they kept. People can exchange the receipts for gold at a later date.
Pros and Cons
Paper money is more economical because it uses materials that are cheaper than metals. It’s also more comfortable and faster to print than coins. To make money from metal, we need mines, smelters, and mint. It is different from paper, which can come from materials such as linen and fiber and is abundantly available in nature.
Furthermore, banknotes are also available in various denominations. In Indonesia, there are Rp. 1,000, Rp. 2,000, Rp. 5,000, Rp. 100,000 denominations. It is also easily transferable.
The most significant disadvantage is that it has no intrinsic value. In a sense, the amount of money-making materials is not commensurate with the face value of money. For this reason, its printing creates instability in the economy. Too much money reduces its value and causes inflation, and too little money raises its value and results in deflation.
Its value is also vulnerable to inflation. When inflation is high, money becomes worthless.