There is no doubt that properly managed money system has helped a lot in achieving high stable level of production, employment and real income. Money played an important role by eliminating the demerits of barter system as a medium of exchange. But if we look at the problems of today, we find that money has also played an important role in creating and promoting these problems. As it is said, “Money can act as a good slave, but not as a good master”. Similarly Prof. J.S. Mill says, “If money becomes uncontrolled it will give rise to many distinct and independent effects”. When money is not controlled properly, it proves to be a source of confusion and disorder in the economy.
In a mismanaged money system, there are fluctuations in economic activities resulting in the wastage of economic resources. Another bad use of money is that it has resulted in serious changes in the distribution of wealth. The society has been divided into two different warring camps, the rich and the poor. With the advent of money, man has started thinking only about money. Human values are constantly losing their importance which is a very dangerous trend. Money is not an unmixed blessing. Complete dependence or misuse of money can lead to undesirable and harmful consequences. In the words of Robertson, “Money, which is a source of so many blessings to mankind, unless we can control it, also becomes a source of risk and confusion.” Following are the various disadvantages of money:
1. Demonetization – The demerit of paper currency is that the holder may have to bear the loss. Paper currency is fiat currency. It is issued by fiat (order) of the government. If the government cancels the note then the holder will have to bear the complete loss.
2. Exchange rate instability – The value of paper currency is unstable and subject to fluctuations in exchange rates. The fluctuations in the exchange rate market also create serious effects on the price level in the economy.
3. Monetary mismanagement – The purchasing power of paper currency is an ever-changing process. This means that its face value remains the same but its purchasing power may decline due to monetary mismanagement.
4. Over Issuance – Printing of paper currency is quite easy, so in times of need, the government can issue more notes than required. As a result, the money supply increases which creates inflation in the economy.
5. Restricted Acceptability (Limited Acceptance) – One of the demerits of paper currency is that its acceptability is limited. Its acceptability is limited to the boundary of a country. It cannot be used to make payments to other countries.
6. Inconvenience of small denominators – Paper issue is not common for small monetary denominators like Rupee 1, 2 and 5. In this case metallic currency is preferred over paper currency.
7. Disturbance in Balance of Payments – Excess issuance of money leads to a decrease in the value of money and also leads to inflation. Due to which the price of imported goods increases as they are paid for by exchanging devalued currency for foreign currency. This results in an unfavorable balance of payments. To overcome such deficits, countries have to devalue their currencies – or borrow from the IMF. Due to these factors, poor and developing countries are getting poorer while rich countries are getting richer. Thus economists believe that whether it is domestic inequality or international inequality, both are caused by money.
8. Short life – Though paper currency is not affected by wear and tear, it can be damaged due to fire or water. Due to this the life of paper currency is much less than metal money.
9. Instability – A major disadvantage of money is that its value does not remain stable which creates instability in the economy. Too much money depreciates its value and causes inflation (i.e., rise in the price level) and too little money increases its value and results in deflation (i.e., fall in the price level). It is inflation that distorts the pattern of distribution in favour of the rich. Thus, the rich become richer and the poor become poorer. On the other hand, deflation results in unemployment and hardship to the working class.
10. Inequality of income – Money, through its excessive use and inflationary effects, creates and widens inequalities in the distribution of income and wealth. This had divided the society into the ‘haves’ and the ‘have-nots’ and has led to a class struggle between them.
11. Growth of Monopolies – The use of money leads to concentration of wealth in a few hands and this gives rise to monopolies. The growth of monopolies results in exploitation of workers leading to misery and degradation.
12. Over-capitalisation – Easy borrowing and lending facilities, which are possible through money, may lead some industries to use more capital than required. This over-capitalisation, in turn, results in over-production and unemployment.
13. Hoarding – In the materialistic world, people attach undue importance to money and instead of using it in productive activities, may start hoarding. This will adversely affect the growth of income, production and employment of the economy.
14. Black Money – Due to its holding capacity, money is prone to black money. As money provides an easy means for individuals to pay less tax as it keeps one’s income invisible, black money promotes the evils of black marketing and speculative transactions.
15. Political Instability – High level fluctuations and wide swings in commercial activities due to money can cause political instability. This leads to a change in government.
16. Moral and social evils – Money has created so many social evils. In modern societies, corruption, bribery, distinction between social and private gain, all such are attributed to money. Every proper and improper step is taken to earn money. The craze to earn more money has disrupted family life. The wealthy man is valued in a society, while the man without money is left very much behind. Ruskin once said, “The ghost of money has taken hold of our souls. No religion and philosophy in the world has the power to drive it out”. Austrian economist Ludwig von Mises, in his book “The Theory of Money and Credit”, writes: “Money is responsible for theft, dishonesty, corruption and murder.
17. Not Automatic – The paper currency standard does not work automatically. It is a highly managed standard which requires great care and caution on the part of the monetary authority. A little carelessness can bring disaster to the economy
To conclude: The defects of money, however, do not indicate its abolition. The advantages of money outweigh its disadvantages. What is required is proper regulation of the money supply through wisely designed monetary policy to ensure the efficient working of the economic system and to achieve the socio-economic objectives of the economy.
Read Also:
- Money: Concept, Functions and Role
- 5 Functions Of Money
- Forms Of Money
- What Is Money
- Evolution Of Money
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