FORMS OF MONEY Chapter No: 02

LECTURE ITEMS
1. Forms of money
2. Coinage of money
3. Paper money, its merits and demerits
FORMS OF MONEY
In the primitive stage of economic development various commodities like fish, cow,
rice etc., were selected to be used as barter unit of value. They were than replaced by
uncoined metals for use as medium of exchange. From unstandardized coins to
standardized coins were the next higher stage in evaluation of money. Today paper
money and bank deposits are our major medium of exchange
Money: Any medium that is universally accepted in an economy both by sellers of
goods and services and by creditors as payment for debts
List of things that served as
money On the basis of its evolution, money is generally classified under
Clay three main heads.
Rice 1. Metallic Money
Tea 2. Paper Money
Nets 3. Bank Money
Fish
Animals
Gold
Copper etc..
METALLIC MONEY
Money made up of metals is called metallic money. It was introduced to overcome the
problems in the use of commodity money. The coins were supposed minted in the temple of
Goddess Juno. That’s why the coins were known as money. There are two types of metallic
money. They are:
Standard metallic money:
It is metallic money made up of pure and superior metals like gold and silver. This type of
metallic money has the face value just equal to the intrinsic value. The value inscribed in the
coins is called face value of money. The value of metal used to mint the coin is called
intrinsic value.
Token money:
It is metallic money made up of impure and inferior metals. This type of metallic money has
the face value greater than the intrinsic value.
Since, the prices of metals change with the time; the standard metallic money is not proper
type of money. Moreover, there is need of large quantity of superior and pure metals to mint
the large amount of coins. The metallic money is uniform and durable in nature. It is difficult
to carry in large amount,. There Is also problem of scarcity of metals to mint the coins.
PAPER MONEY AND KINDS OF
MONEY
It is made up of paper. It is legally tendered. It is issued by monetary authority or central
bank of the nation against the reserve of gold. The value of gold kept reserve may be
equal to or less than the amount of money issued. It is main type of legally tendered
money used in every country. It is lighter less costly to print and safe type of money. But
if it is lost, theft or caught fire then owner of the money suffers loss. However it is easy
to carry. There are two types of paper money. They are
Representative paper money:
It is the paper money issued against the reserve of gold equal to the paper money issued.
It represents gold kept as security of money issued. It is convertible to gold at any time.
It is also called convertible paper money.
Fiat paper money:
It is the paper money issued against the reserve of gold of value less than the amount
paper money issued. It is not convertible to gold at any time. It is also called non
convertible paper money. The face value of paper money is far greater than intrinsic
value. Its intrinsic value is infinitely small or nil.
ITS MERITS AND DEMERITS
(MERITS)
Economical
Paper money practically costs nothing to the government. Currency notes, therefore, are the cheapest
media of exchange. If a country uses paper money. It need not spend anything on the purchase of gold for
minting coins. The loss which a country suffers from the wear and fear of metallic money is also
avoided.
Convenient
Paper money is the most convenient form of money. A large amount can be carried conveniently in the
pocket without anybody knowing it. It is very risky to carry on one’s person Rs.5000 in coins, but not in
cash notes. It possesses, in a very large measure, the quality of portability which a money material should
have. In a very small bulk it can contain a very large value. Think of a currency note of Rs.1000.
Homogenous
One essential quality in money is that it must be exactly of the same type. Even among the coins, there
are good and bad coins, but currency notes are exactly similar. It is therefore, a very suitable medium of
exchange.
Elasticity
Paper money is absolutely elastic. Its quantity can be increased or decreased at the will of the currency
authority.
MERITS
Cheap remittance
Money in the form of currency notes can be cheaply remitted form one place to another in
an insured cover.
Advantages to banks
Paper money is of very great advantages to the banks. They can keep their cash reserves
against liabilities in this form, for currency notes are full length tender.
Fiscal advantages
Fiscal advantages to the government of the paper currency are undoubtedly very great,
especially in times of national emergencies like a war. A modern war cannot be prosecuted
by taxes or loans alone. All government have to resort to the printing press. These above
advantages also indicates the Importance of Money for us today.
BOOK MERITS
Economical
Ease of money supply
Promotes economy growth
Internal price stability
Helpful in emergency
Regulation of exchange rates
Uniform quality
DEMERITS:
Danger of Inflation
Internal price instability
Exchange instability
Danger of mismanagement
Fear of demonetization
Use within the country
BANK MONEY
It is short term credit instruments issued by banks. They can be cheques, travel
cheques, bills of exchange, letter of credit, promissory notes, overdrafts,
debit/credit/ATM cards and so on. They are issued for 1 or less than 1 year. They are
called liquid assets. They are discounted within one year, before the time of
maturation. Most of bank money are usable only if there is electronic devices.
COINAGE OF MONEY
It means the process of manufacturing metals in to certain shapes
to maintain the uniformity in all the coins of same kind. In the old
ages gold and silver metals were commonly used as a media of
exchange. There were many problems in the transactions of
metals. So to remove these problems the government has taken
over the sole power of coinage money. Now government converts
the metal into standard coins. Now a days it is very easy medium
of exchange and tempering with the metallic currency is very
difficult
ADVANTAGES OF COINAGE
It has become a convenient commodity as a medium of exchange
and comparing of values.
By milling the edges and stamping the face value of coins, the
chances of clipping of tempering with the metallic currency or
issuing of counterfeit coins has been greatly reduced.
The stamped coins become a historical documents of the state.
TYPES OF COINAGE
1. Free coinage: If the people are allowed to take metals
to the mint for the conversion in to standard coins
without limit it is called free coinage system. Before
1933 this system was prevailing in U.K and U.S.A.
 Limited coinage: When Govt. imposes limits on the
conversion of metal in to standard coins, it is called limited
coinage system. Government keeps in view the currency
requirement of the country. Government imposes limits on the
free coinage of other metals. Sometimes fee is also charged.
The face value is greater than its original value.
CONT..
2. Gratuitous coinage: When Govt. does not charge any fee
for minting coins it is called gratuitous coinage. This system is
adopted at that time when the intrinsic value of bullion is to be
brought at par with its face value.
 Non- Gratuitous Coinage: in this system Government charges fee for
converting metal in to coins. Sometimes, it charges only minting cost
(brassage) and sometimes more than the cost seignior-age.
3. Debasement of coinage: When there is a difference in the
face value of coin fixed by law and the original value of metallic it
is called debasement.
FIGURE 15-1 DEGREES OF
LIQUIDITY

The cost of holding money (its opportunity cost)

is the alternative interest yield obtainable by
holding some other asset.
Money is not backed by gold, silver, or even the
federal government. It is backed by the
confidence of those willing to accept it.
15-15
“THE END”