Banking Awareness

Types of Money
 Banking Awareness
Types of Money

Types of Money

There are four types of Money.

1. Commodity Money

2. Fiat Money

3. Reserve Money

4. Fiduciary Money

Commodity Money: Commodity money is a good whose value serves as the value

of money. Gold coins are an example of commodity money. Commodity money facilitates

this process because it acts as a generally accepted medium of exchange.

Fiat Money: A Fiat money is a type of currency that is declared legal tender by a

government but has no intrinsic or fixed value. Fiat currency is a national currency usually

issued by a country's government or central bank. Well-known examples of fiat currencies

include the pound sterling, the euro, and the US dollar.

Note: RBI has introduced the central bank digital currency (CBDC) or e-rupee recently.

According to the RBI, “CBDC is the legal tender issued by a central bank in a digital form. It

is the same as a fiat currency and is exchangeable one-to-one with the fiat currency."

Reserve Money: Reserve Money is Currency in Circulation plus Deposits of Commercial

Banks with RBI. It is the base level for the money supply or the high-powered component

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 Banking Awareness
Types of Money

of the money supply.

Fiduciary Money: Fiduciary money is a type of currency that does not have coverage in

material properties (to which we can include noble gold, among them gold, among

others). Fiduciary money is accepted based on the trust of its issuer (the bank).

Measures of Money Supply:

Money supply, like money demand, is a stock variable. The total stock of money in

circulation among the public at a particular point in time is called the money supply. RBI

publishes figures for four alternative measures of money supply, viz. M1, M2, M3, and M4.

They are defined as follows:

 Reserve Money M0 = Currency in circulation + Bankers’ deposits with the RBI +

‘Other’ deposits with the RBI

 Narrow Money M1 = Currency with the public + Demand deposits with the banking

system + ‘Other’ deposits with the RBI

 Intermediate Money M2 = M1 + Short-term time deposits of residents (including and

up to the contractual maturity of one year).

 Broad Money M3 = M2 + Long-term time deposits of residents + Call/Term funding

from financial institutions.

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