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August 03, 2014

Types of Money


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Friends, in our last post we have discussed about the Introduction of Money. Today we shall discuss about it's types.

Broadly speaking, money may be classified into three main categories. Those are,
  1. Commodity Money
  2. Metallic Money
  3. Paper Money
These may be considered along with several other types of money.
  • Commodity Money : Primitive money consisted of some commodities such as rice, cattle, goat, etc. 
  • Metallic Money : In course of time pieces of gold, silver, copper or bronze came to be used as money. These may be regarded as metallic money. To start with, the value of such money in exchange (i.e., in terms of goods commanded by the same) was equal to their intrinsic value (i.e., the value of their metal content). Metallic money could be of two types. Those are, Full Bodied Coins and Token Coins.
    • Full-Bodied Money / Coins : Coins of which the value in exchange was equal to their intrinsic value are called full bodied money. Thus, when one-rupee coin contained one rupee worth of silver, it was a full-bodied money. 
    • Token Money : Coins which do not contain metal worth their value in exchange are collectively known as 'token money'. A token coin is a coin of which the value-in-exchange is greater than its intrinsic value. 
  • Paper Money : Paper money refers to bank notes and government notes which are used as money. The circulation of paper money began as a substitute for metallic money. It represented a certain quality (weight) of gold or silver. Later on paper notes acquired the characteristics of token money, being generally acceptable without reference to their metallic equivalent. Paper money may be regarded as a form of token money. 
  • Currency : The word 'Currency' is used to indicate the aggregate coins and paper notes (paper money). Currency in this restricted sense means all tangible media of exchange.
  • Representative Money : Paper notes and token coins which are freely convertible at fixed rate into fully-bodied coins or equivalent bullion (gold, silver etc), are collectively known as 'representative money'. This type of money was adopted in India in the year 1927 when rupee notes and coins were freely convertible into gold
  • Flat Money : When notes and token coins are not convertible into full-bodied money or bullion, but are generally acceptable on the basic of government decree (order or fiat), they are known as 'fiat money'. 
  • Unlimited Legal Tender : Money which is decreed by government to be legal tender to an unlimited extent in known as 'unlimited legal tender'. Creditors are bound to accept payment in such money to an unlimited extent. In India, the rupee note and coins are unlimited legal tender. 
  • Limited Legal Tender : When notes and coins are legal tender only to a limited extent, they are known as 'limited legal tender'. Small coins in India are legal tender to the extent of one rupee. 
  • Optional Money : Notes and instruments such as bills of exchange, cheques, promissory notes, hundis etc., are often accepted in discharge of debts and obligations although they are not legal tender. Collectively such instruments maybe called 'Optional Money'. Their acceptability is based on the mutual consent of parties. 
  • Bank Money : Bank deposits which are withdrawable by cheques are often included in the category of money and known as "Bank Money". Banks create deposits when they extend credit ti individuals and business firms. These deposits are also included in the category of bank money. Notes issued by banks form another part of bank money.
  • Credit Money : The amount of bank credit extended to individuals and business houses are mostly held by them in the form of bank deposits. These deposits are withdrawable by cheque just like primary deposits made by depositors. This part of bank money is known as 'Credit Money'.


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