Advantages & Disadvantages of Using Paper Currency

A dollar bill, also known as a Federal Reserve Note, is a form of fiat currency that makes the trading of goods and services easier by not having to carry around large items in exchange for those goods and services. Paper money has many advantages, but it also many dangers that can hinder the very value of the denomination it is intended to represent. Weighing these advantages and disadvantages has become a subject of great political debate.

Paper money comes in many denominations, which allows you to carry large amounts of legal tender without having to move large, bulky forms of money. It takes up little space and is widely recognized as a note of value that can be traded for any goods or services. Five $1 bills take up as much space as five $20 bills, so it is an easily fungible and convertible form of money, unlike gold or any other asset.

Not only is paper money small and transportable, but it also is much cheaper to produce than the value it may represent. According the U.S. Bureau of Engraving and Printing, as of 2018, it costs as little as 5.6 cents to produce a $1 bill and up to 13.2 cents to produce a $100 bill. Notes generally last between 4.5 and 15 years before they need to be replaced.

Unlike any other store of wealth, paper money can be printed at will by the Bureau of Engraving and Printing. If there is a need, such as in times of a national emergency or monetary deflation, the bureau can print and release as many bills as needed to resupply the population with paper money.

Conversely, printing too much paper money as required to sustain moderate growth can lead to high rates of inflation. As the number of legal notes increases, the value of those notes decreases because more dollars are chasing relatively fewer goods and services, which causes prices to rise. If inflation gets out of control, it can lead to hyperinflation where a vicious cycle of printing new money is needed to make up for the fact that old money is perpetually losing value.

Paper money is valued by a nation's citizens only if all of those citizens agree to have the same confidence in that currency to represent the value stated on it. If public confidence fades, whether because of high national debt or political turmoil, chaos can ensue where goods and services will be traded only in kind, meaning paper money can become practically useless. This happened in the Weimar Republic in Germany during the 1920s and was happening in Zimbabwe in 2008, where inflation was running at an annual rate of 89 sextillion percent.

Paper money is susceptible to accidental tearing, shredding, burning and being run through the laundry. Federal Reserve Notes are not insurable by the U.S. government but can be replaced if enough of the damaged note remains. Damaged or mutilated notes can be submitted to the Bureau of Engraving and Printing in Washington, D.C., where an examiner will determine whether they can be replaced at full value.