What we are going to Learn in Today’s

Lecture…

What are Forms of Money?

What are Principles of Note Issue?

What are Methods of Note Issue?

Difference between money & near money.

 Forms of Money

Bank Plastic
Commodity Metallic Paper
Money Money Money Money Money
1: Commodity Money
Commodity Money
Commodity money can be thought of as the
earliest form of the money. In ancient times
money was in the form of different goods
that were commonly used by people in
everyday life. However, the problem was
that different societies were using different
things as money. So there was no
standardized unit of account or measure of
value.
Commodity Money
Clay Cowry Shells Tortoise Shells

Whale Teeth Cattle's Horses

Cigarettes Salt Corns

Pots Boats Stones

Iron Wool Slaves

2: Metallic Money
Metallic Money
 Metallic money consists of coins, made of
gold, silver, copper or nickel.
 Metallic currency varies in weight, fineness
and in value.
 People started using these metals as money
because they were scarce.
 Metallic money are of small denomination.
 Advantages
– easily kept
– Converted into other type of currency
– No chance of melting
 Disadvantages
– Limited legal tender money
Kinds OF Metallic
Money

Full bodied Token

Money Money
Kinds OF Metallic
Money
 Full Bodied Money
whose face value is equal to the intrinsic
value.
 Token Money
It face value or printed value is higher than
the value of metal Contain in it. Now a day’s
all coins in Pakistan are the examples of
token money.
 Leather Money

Resource Person :
Muhammad Rafiq Superior College 11
University Campus
Leather Money
 Banknotes in the form of leather
money were used in China
 One-foot square pieces of white
deerskin edged in vivid colors were
exchanged for goods
 This is believed to be the beginning of
a kind of paper money

Resource Person : Superior College 12

Muhammad Rafiq University Campus
3: Paper Money
Paper Money

 The term paper money refers to the notes

issued by the state or by a bank, usually the
Central Bank. The origin of this from of
money can be traced back to the receipts
issued by the goldsmiths.
 Kinds OF Paper Money

Representative
Convertible Fiat
Paper Money
Paper Money Paper Money
Worked till 1914
Kinds OF Paper Money
 Representatives paper money
Representative paper money is on which is fully backed
by gold or metallic reserves. This means that govt. is in a
position to convert all the notes into gold.

 Convertible paper money

Convertible paper money is such a form of money
which can be converted into gold & metallic reserves but not all
the notes issued by the govt. are fully backed by the gold.

 Fiat paper money

Fiat paper money is that we have got in our pocket.
Neither it is convertible, nor it is fully backed by gold or metallic
reserves.
4: Bank Money
Bank Money
 Bank money means near money which is
not always legal tender money. But it is
widely accepted as a medium of exchange.
Bank money mostly consist of
– Cheques
– Drafts
– Bill of exchange.
Kinds OF Bank Money

Bills of
Cheques Drafts
Exchange
Cheque
Bill of Exchange
Draft
 Kinds OF Bank Money
 Cheques
– Cheques is a written instruction on a specified piece of paper
from a client to his bank instructing the later to pay a certain
sum of money.
There are three kinds of cheques
 Bearer cheques
 Crossed cheques
 Order cheques
 Bill Of Exchange
– It is a convenient way to pay for commercial transaction in
credit. The seller instead of taking cash from the buyer draws a
bill on him which the buyer accepted by signing it. This bill can
be a sight bill or time bill.
 Draft
– Draft is just like a cheque however the difference is that it is
drawn by the bank on its own branch or on any other banks
branch.
5: Plastic Money
Plastic Money

Plastic money means the credit cards and

plastic cards which have silicon chips and a
specially printed set of characters. These
cards are used for making payments at
ordinary shops and at ATM (Automated
teller machine).
 Overview of note issue
principles

At the time of Bank Chartered Act in England

1844 there was a huge controversy over the
matter as to what is the most suitable method &
principle of issuing notes. Some economists favor
the currency principle and other advocated for
banking principle. Both these principles are
discussed in next coming slides.
Types of note issue
principles

Currency Banking
Principle Principle
 Currency Principle
The currency principle is based on
100% gold backing. According to this
principle state or central bank must
keep 100% reserves against each and
every note issued.
 Merits of Currency
Principle
 Full Safety

 No Over Issue

 Stability

 confidence
 De Merits of Currency
Principle
 Inelastic

 No Use of Gold

 Not suitable for modern economy

 Banking Principle
banking principle lies on the other hand.
This principles says that note issuance
should be dealt independently by central
bank and it shall be allowed to issue notes
according to the ongoing circumstances also
there is no need of full backing of gold
under this principle.
Merits of Banking Principle
 Elastic Supply

 Economical

 Usage of Gold reserves

Merits of Banking Principle

 Suitable for modern economy

 Helpful in emergency
 De Merits of Banking
Principle
 Danger of over issue

 Lack of convertibility
 Methods of Note Issue

Fixed
Fiduciary
System

Proportional
Reserve
System

Exchange
Management
 Fixed Fiduciary System
this is widely recognized as an important
method of note issue. Under this system a
limit of volume of currency has been fixed
by central authority. This limit is called
fiduciary limit. Any note issue in this
fiduciary in to be backed by govt. securities.
However any note issued above this limit
are to be 100% backed by gold.
Merits of Fixed Fiduciary
System
Controlled Supply

No Danger of Over Issue

Proportional Reserve System

under this system the central bank is required to

keep 100% reserve for a particularly percentage of
notes issued. The rest of the notes issued are
backed by govt. securities and govt. bills. Usually
25% to 40% of notes issued are fully backed gold
and rest are backed by govt. securities.
 Merits of Proportional
Reserve System
 A widely prevailed System

 Elastic

 Responsive
 De Merits of Proportional
Reserve System
 Lockup of Gold

 Unstable

 Rigid
 Exchange Management
J.M Keynes has suggested a modified form of
proportional reserve system called “
Exchange Management”.
According to this system, the Central Bank is
required by law to keep the percentage
required, against the note issue in the form of
gold and silver, Foreign bills etc at some foreign
bank, Where gold standard prevails. This method is
adopted by Pakistan, India and many other
countries, Because it is very much elastic.
System Prevailing In Pakistan

Pakistan has adopted “Proportional Reserve

System” with “Exchange Management”. The
State Bank of Pakistan is authorized to issue
currency notes after keeping 30% reserves in
shape of gold and approved foreign exchange at
central Bank.
 Merits of Exchange
Management
 Elastic System
 Helpful in Crisis
 Saving precious metals

 Useful for developing countries

NEAR MONEY

 Near money is not perfect money but

something adjacent to it. It contain
characteristics of perfect money & can be
converted into money very easily.
Examples Of Near
Money
 Demand Deposits (cheques, Drafts)
 Bonds
 Govt Securities
 Debentures
 Bills Of Exchange
 Insurance Policies
Difference between money
& near money

 Interest earning
 Liquidity
 Legal tender
 Standard unit
Importance of near money
 Spending & consumption
 Inflationary trends
 Economic policy
 Liquidity preference
 Difficulty to copy
 Uniformity
 Growth & development
 International trade