Thursday, 28 April 2016

Money - Different types of money | forms of money in economics

Do you realise that money is used nowadays, in the modern economy, in various types and forms?

Money can be broadly classified into four major types. This classification describes the abstract types or forms of money as opposed to physical forms of money.

Types of Money
  1. Commodity money.
  2. Representative money.
  3. Fiat money.
  4. Fiduciary money.

Commodity money
Commodity money represents commodities with intrinsic value. Gold and silver are examples of commodity money in our present economy. Their face value is equal to their real value. In older times, important commodities like rice, wheat, tobacco, seashells, pearls, valuable stones were also treated as commodity money. This kind of money is characterised by the scarcity of the commodity and the value attached to the commodity by the parties to the transaction. But, in present day economy, this kind of money is not of much significance even though Gold and Silver are used as a storage form of money.

Representative money 
Representative money is that which can be exchanged for a real commodity or money. For example tokens, papers or certificates issued a to a person which can be exchanged by the receiver of that token for some real commodity such as gold or silver or any other commodity. Coins and paper currency can be treated as representative money. It represents the quantum or degree of value that is backed by it. Gold certificates, Silver certificates are also some examples of it.

Fiat money
Fiat money is any money declared by governments to be legal tender money. This money by itself has no intrinsic value. It is not backed by any physical commodity. But, it is accepted and treated as money at all transactions due to its nature of being legal tender. For example, paper currency. You can not reject it. You are bound to accept it as money.

Fiduciary money
Fiduciary money represents a type of money based on the trust and reputation of the issuer. The issuer of the instrument of money, whether government or company or any trustee, promises to pay a certain amount of money or value as mentioned on the instrument and the beneficiary keeps faith and trust in it. Most of the transactions in present day economy are conducted through these fiduciary type of transactions.

Forms of Money
Now, coming to physical forms of money, some popular and more common forms of money are discussed here.

Coin Money
Different forms of coins are used like Gold, Silver, Copper, Bronze, Nickel, etc. for issuing coins that represent a certain value printed on it.

Paper Money or paper currency
This form of money constitutes the currency notes printed by the government or central bank and other forms of bills of exchange, promissory notes, checks, bank drafts, etc.

Bank Money or Demand Deposits money
Bank money is the money created through deposits made by the public into their bank accounts. Demand deposits are money deposited into banks by customers which are returnable to them on demand without any prior notice to banks. This money is characterised by the fact that original physical money available with the banks are manipulated into larger multiples due to the facility of minimum reserve rate ratio to be maintained by the banks. So, actual money available with the bank at any time will be much lesser than their account book balances.The total money created in this way can be known only by counting the actual money in circulation with public and then, adding to it the actual money with banks and also the value of cheques or drafts in hand with public and at the bank.  

Token Money
Token money is a form of money in which case, the tokens like coinage or paper currency in itself have no value but they represent and guarantee the value mentioned on them to be reimbursable to them.

Full bodied money
Full bodied money is the form of money where its real value represents its commodity or physical value. Gold coins and Silver coins are examples of full-bodied money or real money. They have the same physical value as their face value depicts. 

Standard Money
Standard money refers to the form of money used by different countries or economies for their accounting purpose. For example, the below-mentioned countries use the corresponding units of standard for their circulation and accounting purposes in their economies.
U.S.     Dollar ($)
U.K.     Pound (L)
India    Rupee (Rs.)
Europe  Euro  (E )
China    Yuan or Renminbi
Japan    Yen   (Y )

Legal Tender Money  
Legal tender money is that form of money which is acceptable legally. You cannot reject any payment made with legal tender money. Paper currency is fully legal tender money and one should accept all payments in that form. Coinage is not fully legal tender. Only small payments can be made through coins and you have the right to refuse payments made in large quantities of coins.
Electronic currency or Digital Money
Electronic money also known as e-money is a form of money that is transacted through the internet or electronic and digital transactions. Funds get transferred and payments or receipts made through internet transactions using computers and mobile phones. Examples for e-money are bank deposits operated through the internet, fund transfers made online, claims against banks and agencies resulting out of e-transfers or payments and account settlements. Paypal, Google Wallet, Apple Pay, Rupay, Bitcoins, etc. are most popular forms of this kind of money.