Kinds Of Money : Coins, Paper And Deposit Money

Money can be classified on the basis of its physical form, legal recognition or its nature. We will discuss these three kinds of money in three individual posts.

Kinds of Money : Coins, Paper and Deposit Money. (You are reading this)
Kinds of Money : Legal Tender Money and Optional Money.
Kinds of Money : Money Proper and Money of Account.

Types Of Money - ShineMat

On the basis of money commodity or the physical form of money there are three principal kinds of money.

  1. Metallic Coins.
  2. Paper Money.
  3. Deposit Money.

The first two categories Coins and Paper money are commonly grouped together and designated as “Currency” or by the descriptive titles such as “Cash” “Hand to hand money” or “Pocket book money”. Deposit money is issued by commercial banks on the basis of their demands liabilities or deposits which are transferable by cheques.

The physical characteristics of three kinds of money have an important bearing on their uses and quantitative importance in the money supply. In present day conditions, metallic coins are generally used only in the form of coins of small denomination and constitute a relatively minor fraction of total money supply. They, however, play a distinctive and indispensable role in retail trade where small amounts of money are used in transactions. In terms of volume, outstanding paper money is considerably more important than coins. In relatively less developed economics, paper money or currency notes are most widely used in mediating financial and other business transactions. But in the advanced economics, paper money is considered as “Still essentially a larger denomination complement to coin in retail trade.” It is the deposit money which is predominant in such economics. It is particularly more suitable for transactions where larger sums or money are involved.

Metallic coins are further classified as Standard or “Full-Bodied” coins and “Token coins”. A standard coin is that coin whose face value is equal (or almost equal) to its intrinsic value.
For example: The value of its component material. That is why it is also known as full-bodied coin. Full-bodied money is usually encountered only where a country has a commodity standard such as the gold standard or the silver standard with the standard commodity circulating in the form of coin. The standard coin is unlimited legal tender and it has generally free coinage.
The British sovereign prior to 1914 and the Indian rupee between 1835 and 1893 were standard coins. A token coin, on the other hand, is that whose value as money is appreciably greater than that of the matter of which it is composed. All coins in domestic circulation in the modern economics are token coins, though some of these may be circulating as unlimited legal tender. Coins of smaller denomination are used as subsidiary money and are generally limited legal tender.

In a sense, all money in domestic circulation today is token money. For paper money the commodity value of the money stuff is negligible, and with deposit money we attain the ultimate in token quality since there is literally no component material.

Reference Book: Money Banking and International Trade.

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