Drawbacks of Commodity Money

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ADVANTAGES OF COMMODITY MONEY

The main advantage of commodity money is simply that it


serves an additional purpose. For example, gold can be turned
into jewelry, while cigarettes can be smoked. This gives the
holder added options; he can either use or spend the money.
Another advantage of this type of money for some people is
that it may be possible to acquire money that wasn't previously
in circulation. For example, if gold is used as commodity money
and somebody discovers more of this metal, he or she may be
able to get more value from its role as money than from its role
as a base for jewelry.
ADVANTAGES OF PAPER MONEY
1. It is economical, since it substitutes a less expensive
material than metal for money and conserves the metal for the
arts.
2. It is easily and quickly increased; the printing press is more
expeditious than the mine, smelter, and mint.
3. It has fiscal advantages; in emergencies, before taxes can be
laid or bonds sold, paper money may be run off in anticipation
of taxes or receipts from sales of bonds; it can be used to pay
the obligations of the state, and amounts to a forced loan
without interest.
4. It is more convenient than metallic money; it is light in weight
and the weight does not increase with the amount; it is easy to
conceal and to ship by mail or express.
5. If properly issued, it provides a certain elasticity to the
currency.

ADVANTAGES OF PRECIOUS METAL COINS


1. Depreciation Protection
Both gold and silver offers substantial level of protection during
economic depression. In particular, gold acts a strong store of
purchasing power. It depends on this feature to offer substantial
protection against depression. Currently there is no direct link
between gold and major world currency as it was the case long
ago. Both gold and silver are highly liquid and are widely
accepted anywhere in the world. In particular, gold do perform
well during the time when the central bank has used certain
monetary policies to weaken its currency. In this case, the
amount of currency in circulation will increase as expected but
the amount of gold will remain relatively constant across the
world.
2. Absence Of Liability
These two precious metals, gold and silver do not form a liability
to

bank,

an

individual,

business

entity

or

government.

Companies can become bankrupt while the government can


default on its debts. In the contrast, precious metal wont be
affected in a similar way. Your portfolio will remain its worth if
you invest in gold or silver. Any other asset can crash to zero
value but this can never happen with precious metals.
3. International Liquidity
The precious metal such as gold and silver offers the best
liquidity value internationally. It will be easy for you to sell gold
or silver to any part of the world because of its high liquidity.
This is because there will be someone willing to buy your

precious metal irrespective of your location. Most people are


willing to buy precious metal because they dont depreciate in
value.
ADVANTAGES OF ELECTRONIC MONEY
We can transfer funds, purchase stocks, and offer a variety of
other services without having to handle physical cash or checks
as long as bank is providing such services online. The significant
effect is we do not have to queue in lines, thus saving our time.
.
Debit cards and online bill payments allow immediate transfer
of funds from an individual's personal account to a business's
account regardless the designated place (around the globe) by
few clicks without any actual paper transfer of money. This bring
convenience

individual

like

us

and

businessmen.

Consumers will have greater privacy when shopping on the


Internet using electronic money instead of ordinary credit cards

DRAWBACKS OF COMMODITY MONEY


Risk of Volatility

While commodity money typically has less volatility during


turbulent economic developments, commodity money can still
lose value. For example, both gold and oil are valuable
commodities; however, the prices of both gold and oil undergo
increases and decreases over time. Thus, the risk of volatility
still exists with commodity money. Supply and demand can
significantly affect the price of commodities. For example, after
a hurricane, the supply of oil may get disrupted, causing the
price of oil to rise.

Lack of Divisibility

Commodity money is typically not as divisible as


traditional paper money. For example, you can divide dollars
into quarters, nickels, dimes and pennies; however, you may
have a difficult time dividing a bar of gold into small
denominations needed to make everyday purchases.
Value

Another problem with commodity money is assessing the


value of items purchased with the commodity money. In other
words, how can you determine that you are, in fact, getting your
moneys worth for the purchased item? Measuring the exact
amounts of value of commodity money is not easy, and
therefore, it is difficult to manage your wealth using commodity
money. In contrast, if you buy using paper money, you always
know what you get for that paper money, even if the value
changes over time.

DRAWBACKS OF PAPER MONEY


(i) Paper money is of no value outside the country of issue.
Gold and silver coins are accepted even by foreigners, as
they have got some intrinsic value.
(ii) There is a possibility of the damage to paper. Fire may
burn it; if the place is flooded, it is gone; it may also be
eaten up by white ants.
(iii) A serious drawback in paper currency is the ease with
which it can be issued. There is always a danger of its
over-issue when the Government is in financial difficulties.
The temptation is too great to be resisted. Once this
course is adopted, however, it gathers momentum and
leads to further note-printing, and this goes on till the
paper currency loses all value. This happened in various

countries in recent times: in Russia (1917), in Germany


(1919), in China (1944), and so on.

Disadvantages of using coins


First, inflation raises the weight of coins you need to carry. If you
have 8 ounces of coins in you pocket today, they could be worth
$25. In 10 years time with inflation at about 7%, you will need
one-pound weight of coins to buy the same bundle of goods. At
some
point,
your
pants
fall
down!
It could be argued that lighter coins could be minted; made of
aluminium or even plastic. I'm not sure how that would be
accepted by the spending population at large. There have been
examples of such light and cheap coins in circulation in Europe
and Africa during periods of warfare and depression. But they
were
not
popular.
Secondly, coins cost quite a lot to make. They cost more per
face-value than paper money costs. This is so obvious that
dimes and nickels now cost more than that to mint. Quite soon,
it will not be worth minting quarters or even half-dollars. Some
countries have simply abandoned metal coins for such small
denominations. The copper and nickel in many small-value coins
is more valuable than the coins themselves; criminals are
melting down the coins, refining and selling the metals in bulk.

DRAWBACKS OF ELECTRONIC MONEY


E-cash and E-Cash transaction security are the major concern.
Frauds on E-Cash are on the catch recent years. Hackers with
good skill able to hack into bank accounts and illegally retrieve
of banking records has led to a widespread invasion of privacy
and has promoted identity theft. There are many other tricks
including through phishing website of certain banks and emails.
Money flow and criminal/terrorist activities are harder to be
traced by government. With the continued growth of E-Cash,
money flow in and out of countries at immediate speed without

being traced will weaken the government's ability to monitor


and income in tax. Money laundering and tax evasion could be
uncontrollable in e-cash systems as criminals use untraceable
internet
transaction
to
hide
assets
offshore.
.
E-Cash is not for everyone. Low income groups without
computer and internet access are unable to enjoy the usage of
E-Cash. This issue shall be resolved so that E-Cash could be
implemented widely.
.
There is also a pressing issue regarding the technology involved
in electronic cash such power failures, internet connection
failure, loss of records and undependable software. These often
cause a major setback in promoting the technology.

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