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MONEY AND ITS TYPES

MONEY AND ITS TYPES

MONEY

  • Money is one of the greatest inventions of mankind. “Money is what Money does”. In a wider sense, Money includes all mediums of exchanges like Gold, Silver, Copper, Paper, Cheques, and Bills of exchange, etc.
  • In other words Money can be described as a token or a payment option which is used in our society to settle debts and to pay for the services and commodities which are provided to us.
  • In other words, money is the medium of exchange in our society which has also been accepted by the law. Money plays a pivotal role in a country’s economy.

Definition of Money

  • “Anything that is generally acceptable as a means of exchange and which at the same time acts as a measure and store of value.”
  • Thus, Anything is Money, which is generally acceptable as a medium of exchange, and at the same time it must act as a measure and a store of value.
  • Anything implies a thing to be used as money need not be necessarily composed of any precious metal. The only necessary condition is that, it should be universally accepted by people as a medium of exchange.

TYPES OF MONEY

  • There are several kinds of money varying in liability and strength. The society has modified the money at different times and in this way several types of money are introduced.
  • When there was ample availability of metals, metal money came into existence later it was substituted by the paper money.
  • At different times, several commodities were used as the medium of exchange. So, it can be said that according to the needs and availability of means, the kinds of money has changed. There are 4 major types of money:

Commodity Money

  • It is the simplest kind of money which is used in barter system where the valuable resources fulfil the functions of money.
  • The value of this kind of money comes from the value of resource used for the purpose. It is only limited by the scarcity of the resources.
  • Value of this kind of money involves the parties associated with the exchange process. These money have intrinsic value.
  • Whenever any commodity is used for the exchange purpose, the commodity becomes equivalent to the money and is called commodity money.
  • There are certain types of commodity, which are used as the commodity money. Among these, there are several precious metals like gold, silver, copper and many more.

Fiat Money

  • It has been defined as any money declared by a government to be legal tender; state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard; money without intrinsic value.
  • The term derives from the Latin fiat (“let it be done”, “it shall be”). While gold- or silver-backed representative money entails the legal requirement that the bank of issue redeem it in fixed weights of gold or silver, fiat money’s value is unrelated to the value of any physical quantity.
  • Even a coin containing valuable metal may be considered fiat currency if its face value is higher than its market value as metal. All reserve currencies have been fiat currencies, including the U.S. dollar and the Euro.

Fiduciary Money

  • Today’s monetary system is highly fiduciary. Whenever, any bank assures the customers to pay in different types of money and when the customer can sell the promise or transfer it to somebody else, it is called the fiduciary money.
  • Fiduciary money is generally paid in gold, silver or paper money. There are cheques and bank notes, which are the examples of fiduciary money because both are some kind of token which are used as money and carry the same value.

Commercial Bank Money

  • Commercial Bank Money or demand deposits are claims against financial institutions that can be used for the purchase of goods and services.
  • A demand deposit account is an account from which funds can be withdrawn at any time by cheque or cash withdrawal without giving the bank or financial institution any prior notice. Banks have the legal obligation to return funds held in demand deposits immediately upon demand (or ‘at call’).
  • Demand deposit withdrawals can be performed in person, via cheques or bank drafts, using automatic teller machines (ATMs), or through online banking.
  • There are also various other types of money like the credit money, electronic money, coin and paper money, fractional money and representative money as discussed below:

Fractional Money

  • It is a hybrid type of money which is partly backed by a commodity and has a fiat money transaction purpose.
  • If the commodity loses its value then Fractional money converts into Fiat money.

Representative Money

  • It represents a claim on commodity and it can be redeemed for that commodity at a bank.
  • It is a token or paper money that can be exchanged for a fixed quantity of commodity. Its value depends on the commodity it backs.

Coins

  • Metals of particular weight are stamped into coins.
  • There are various precious metals like gold, silver, bronze, copper whose coins are already used in human history.
  • The minting of coins is controlled by the state.

Paper Money

  • Paper money doesn’t have any intrinsic value, as a fiat money it is approved by government order to be treated as legal tender through which value exchange can happen.
  • Governments print the paper money according to the requirements which is tightly controlled as it can affect the economy of the country.

Indian Economy

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