The demerit of paper money is that the holder may have to suffer loss. The paper money is fiat money. It’s issued by fiat(order) of the government. In case the of government cancels the currency notes the holder has to bear full loss.
Exchange rate instability:
The worth of paper money is instable and reaches the mercy of fluctuations in the exchange rates. The fluctuations in the exchange rate market also produce serious effects on the purchase price level in the economy.
Purchasing power of paper money is definitely an ever – changing process. Which means that its face value remains same but its purchasing power may decline consequently of monetary mismanagement.
The printing of paper money is rather easy, so in times of need the usa government can issue notes more compared to the requirement. Consequently method to getting money increases that produces inflation in the economy.
Restricted acceptability (limited acceptance):
One of the demerits of paper money is so it’s limited acceptance. Its acceptance is fixed within the boundaries of a country. It can’t be properly used to generate payments to other countries.
Inconvenience of small denominators:
Paper issue is not for small monetary denominators such as for example like 1,10,25,50 paisa and even for Rs. 1,2 and 5. In this case metallic money gets preference over paper money.
Troubling Balance of Payments:
Over problem of money results in decrease of value of money and also causes inflation. Consequently that price of imported goods increases because they’re to be paid by exchanging devalued currency for foreign currency. It results in unfavorable balance of payment.
Even though paper currency is not afflicted with wear and tear but it might be damaged consequently of fire or water. Consequently with this the expected life of the paper currency will be a lot less compared to the metallic money.
Paper money is portable i.e. it could quickly be transferred in one place to another compared to metallic money. The price tag on transferring paper money is rather low and it might be transferred really limited time period.