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Classification of Money

Different economists have classified money in different ways. We shall discuss some of the important forms of money in this section.:

Actual Money and Money of Account

J.M. Keynes in his Treatise on Money has distinguished between actual money and money of account. Actual money is that money which actually circulates and is current in practice in a country. Actual money is the medium of exchange of goods and serives in country. It is in the shape of actual money that all payments are made and a store of general purchasing power is held. For example, in India, the coins and paper notes of various denominations are actual money.

Money of account is “that in which debts and prices and general purchasing power are expressed. It is that form of money in terms of which the accounts of a country are kept and transactions made.” The monetary unit in which the money of account is expressed may not exactly be a circulating medium.

Generally speaking, money of account and actual money are not different. At certain unusual time they might, however, be different. For instance, during the hyper-inflation of 1920’s in Germany, all payments were made in terms of German Marks. But the money of account changed tot eh US dollar or Swiss franc because of relative stability in their value.

Commodity Money and Representative Money

Actual money may be either commodity money or representative money. Commodity money is made of certain mortal, and its face value is equal to its intrinsic value. It is also referred to as full-bodied money. Commodity money is both a medium of exchange and a store of value.

Representative money means those notes which are freely convertible into full-bodied money. It may be made either of cheap metal or convertible paper money. This money is not a good medium for storing purchasing power, because it commands little intrinsic value.

Representative money is further sub-divided into: (i) Convertible money, and (ii) Inconvertible money. Convertible money refers to that money which the issuing authority is under an obligation to convert into commodity money. Inconvertible money, contrary t representative money, is that money which the issuing authority is under no obligation to convert into commodity money.

Legal Tender money and Optional Money

Money is different not only on the basis of the relationship between its monetary usage and commodity usage but also from the standpoint of the law.

Certain kinds of money are granted ‘legal tender’ power by the government. They are legal tender money. It is that money which every individual is bound to accept in exchange for commodities and services, and in the discharge of debts. The legal tender status given by a government to a certain kind or kinds of money may be limited or unlimited.

(1)    Limited Legal Tender Money is that money which no person can be forced to accept beyond a certain maximum limit. The maximum limit is fixed by the government under statute. In our country, coins of small denominations are limited legal tender money.

(2)    Unlimited Legal Tender Money is that money which a person has to accept up to any limit because it is an unlimited legal tender. This type of money is accepted by the people to an unlimited extent. In our country, two-rupee coin, one-rupee coin, half-rupee coin and paper notes of all denominations are unlimited legal tender money.

Optional Money is non-legal tender but is genially accepted by the people in final payments. It consists of credit instruments  like bills of exchange, cheques, handiest, etc., which do not enjoy any statutory backing. Nobody could be forced to accept this type of money. The acceptance of optional money depends upon the choice of a person.

Money and Near-Money

The general acceptability which characterizes money also makes it the most liquid of assets. liquidity is the quality of being immediately and always exchangeable in full value for money.

Obviously, money is by definition 100 per cent liquid. One way of categorizing other assets is by how liquid they are. At the other end of the liquidity spectrum are illiquid assets, such as houses. Between the two extremes, certain assets can be identified as ‘near-money’ because they can be held with little loss of liquidity. National savings deposits, building society deposits and other similar securities are not money because they are not generally acceptable in paying debts, but they can be easily and quickly exchanged for money without ant loss. So they are highly liquid forms of ‘near-money’ or quasi-money.

Metallic Money and Paper Money

This classification depends upon the material of which money is made. money made of some metal is called metallic money, and that of paper is known as paper money.

(i)    Metallic money is further classified under two sub-hands:

(ii)    Token Money.

(i) Standard Money is the money of ultimate redemption. If the government has adapted gold standard, the banks and the government will  upon demand pay out gold in exchange for any other form of money. The face value of a standard coin is equal to its intrinsic value. it is unlimited legal tender, and has free coinage.

(iii)    Token Money. It is that unit of currency the face value fo which is higher than its intrinsic value. Our rupee is a token money.

(3)    Paper Money. Pater money, though introduced long ago, has com into prominence only during the present century. Paper money includes bank notes and government notes which circulate without difficulty.

Paper money can classified under four heads: (i) Representative Paper Money; (ii) Convertible Paper Money, (iii) Inconvertible Paper Money; and (iv) Fiat Money.

(i)    Representative Paper Money. Representative paper money is 100 per cent backed and is full redeemable in some commodity such as gold or sliver.

(ii)    Convertible Paper Money. Convertible patter money is that which can be converted into standard coins at the option of the holder. A less than 100 per cent reserve in metallic form is maintained for his kind of paper money. The basic principle underlying the system is that all the notes are not simultaneously presented by the public for encashment. Therefore, the value of gold and silver kept in the reserves is less than the value of notes issued by the monetary authority.

(iii)    Inconvertible Paper Money. Inconvertible paper money is that money which an not be converted into full-bodied money. Our one-rupee note is good example of inconvertible Paper Money.

(iv)    Fiat Money. Fiat money is another type of inconvertible paper money. It is that money which circulates in the country, under extra-ordinary circumstances, on the command of the State. It is issued generally at a time of crisis. Fiat money is issued by the government without any backing of reserve.

Credit Money

With the introduction of paper money. credit money also came into vogue. Credit money. also known as bank money, refers to bank deposits kept by people with banks which are payable on demand and can transferred from one party to another via the use of cheque . The cheque is an in instrument used to transfer bank deposits and it offers the some conveniences as money.

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