Saturday, August 11, 2012

Class XI, Principles of Economics, "Types of Money"

Types of Money

Generally the classification of money is based on the material that is being used for the purpose. According to the material used, the money can be classified as:

1. Metallic Money

The currency in use or to be used when is made of some metal; it is known as metallic money. The metallic money usually consist of coins made up of gold, silver, copper, bronze etc. a characteristic of these coins is that they are properly shaped and stamped by the central issuing authority to prevent any misuse. In today’s modern age of business the coins are Marley used and issued. The metallic money is further classified as:

Classification of Metallic Money

Full Bodied Coin

Full bodied coin is the one, the face value of which is equal to the quantity of metal used in it. In this case the face value of the coins is equal to its intrinsic value.

Token Coins

A token coin or money is the one whose face value is higher than the value of the metal contained in it. It is usually as a subsidiary unit or coin. In token coin the face value is higher than the intrinsic value.

2. Paper Money

Paper currency refers to the currency notes issued or used in a country. These notes are made up of special kind of paper. Paper currency also includes notes (promissory) and cheques but they circulate as money only in the countries where they are used freely for settling business transactions such as U.S.A and U.K.
In early times when notes were introduced they were backed by an exactly equal amount in gold or silver kept by the issuing authority. Paper money is not wholly backed by some precious metal now. only a proportionate reserves are maintained and a good deal of the paper money rests on people’s of people’s confidence in the word of issuing authority generally the government or the central bank. Such a currency is also called fiduciary issue.

Classification of Paper Money

Paper money may be of following types

(i) Representative Paper Money

When the paper money is backed by an exactly equal amount of in gold or silver kept in reserve by the issuing authority it is known as representative money. Such notes could be exchanged for coins when needed and did nothing more then to represent coins.

(ii) Convertible Paper Money

The currency notes which can be exchanged for full bodied or standard coins is called convertible money. Its value is backed by a proportionate reserve of some precious metal and the confidence in the word of eh issuing authority. It is also called fiduciary money.

(iii) Inconvertible Paper Money

The currency notes that cannot be converted in full-bodied coins. The issuing authority gives no promise for its conversion. It can also be called fiat money.

Advantages of Paper Money

Following are some advantages of the paper money

1. Economical

Currency notes are cheapest media of exchange. Paper money practically costs nothing to the government. It does not need to spend anything on the purchase of gold for minting coins. Certain other expenditure or losses associated with metallic coins are also avoided.

2. Convenient

Paper money is the most convenient mean of money. A large amount can be carried conveniently in the pocket with out any body knowing about it. It possessed in very large measure the quality of portability, which a money material should have.

3. Homogenous

Among the coins there are good and bad coins. But currency notes are all exactly similar. It is therefore the substitute medium of exchange.

4. Stability

The value of money can be kept stable by properly regulating its issue. Managed proper currency method is therefore adopted by many countries.

5. Cheap Remittance

 Money in the form of currency notes can be cheaply remitted from one place to another in an insured cover.

6. Elasticity

Paper money is absolutely elastic. Its quantity can be increased or decreased at the will of the currency authority. Thus paper money can better meet the requirements of trade and industry.

7. Advantages to the Banks

Paper money is of great advantage to the banks. They can keep their cash reserves against liabilities in this form, for currency notes are full legal tender.

Disadvantages of Paper Money

Its disadvantages are as follows

1. No Value Outside the Country

Paper money is of no value outside the country where it is issued. Gold and silver coins were accepted even by foreigners as they had no intrinsic value.

2. Risk of Damage

There is always a possibility of damage to the paper. Fire may burn it, water may tear it etc.

3. Danger of Over Issue

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. Once this course is adapted the momentum leads to further notes printing until it losses all the value. This over issue of notes is called over inflation.

4. Price Increase

Some times especially when the money loses its value there is always an increase in the price of goods. As a result, labours and other people with fixed income suffer greatly. The whole public feels the pinch.

5. Effect on Business

During the days of monetary stringencies in a monetary economy, the business activities are affected very badly. The indirect result of price increase, shortage of currency etc, result in a fall of exports and a rise in imports. It leads to the export of gold from the country, which is not a desirable thing. Its balance of payments gets unfavourable.

3. Bank or Credit Money

Bank money consist of demand deposit, which is drawn by cheques. A deposit is like any other medium of exchange and being payable, on demand, serves as a standard of value or unit of an account as it is convertible into standard of value i.e. money or crash at fixed terms. In the words of J.M. Keynes.

“Bank money is simply an acknowledgment of a private debt expressed in the money of account which is used by passing from one hand to another as an alternative of money to settle transactions.”

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