The Pros And Cons Of Inconvertible Paper Money

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Inconvertible paper money is money that is not convertible into full-weight metallic coin, such as gold and silver coin, on the demand of its holder in spite of its promises or guarantees. Proponents of inconvertible paper money consider it the “ideal money” as it has no intrinsic value and it represents no metallic coin, which they believe to be inferior to paper money. Inconvertible paper money derives from two sources. First, and the most common today, are bank notes that become inconvertible because of a suspension of redemption in specie. Today’s federal reserve note is an example of this type of inconvertible paper money. When bank notes are no longer convertible to specie, they begin to behave like inconvertible government notes — especially…show more content…
They argue that the value of paper has not fallen; the value of gold and silver have risen. Whenever they do admit to depreciation, the fault is not with inconvertible paper money itself. It is with the government’s failure to use the correct formula or technique, which they are ready to provide, to regulate the quantity of money. If the depreciation occurs during wartime, the argument is that the enemy is flooding the country with counterfeit…show more content…
However, the quantity of newly mined gold entering the market is extremely small when compared with the aboveground stock of gold available for money. This high stock-to-flow ratio stabilizes the value of gold and prevents it from changing significantly. With no restriction other than governmental fiat placed on the production of inconvertible paper money, its quantity can increase without limit — or at least increase until it becomes worthless and no one accepts it. According to the advocates of inconvertible paper money, another advantage that it has over metallic money is that the cost of manufacturing paper money is extremely low. Mining gold is expensive. 5. Not exportable. Adherents identify the inability of inconvertible paper money to be exported to other countries as an advantage that it has over metallic money, which is easily transported. Inconvertible paper money is limited in its circulation to the country of issue. (This may have been true in the past, but it is not true today. The U.S. dollar circulates worldwide. Other fiat inconvertible paper moneys also circulate outside their country of issue.) Under the gold standard, an overissue of money is halted by the exportation of gold. No such mechanism exists to halt the overissue of inconvertible paper

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