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Money is all that serves as a medium of exchange. It includes metallic coins, currency notes, bills of exchange and drafts.
Functions of Money
1. Its serves as a medium of exchange. All buying and selling is done through the medium of money.
2. Money is used as a common measure of value. The values of all commodities are measured in terms of money.
3. It serves as a standard of deferred payment. All browsing and lending is done in money.
4. It serves as a store of value. We store value in the form of money, not in the form of any other commodity.
Types of money
There are many forms of money. Following are the main forms of money.
1. Metallic Money
2. Paper Money
3. Bank Money
4. Legal Money
5. Plastic Money
6. Near Money
1. Metallic Money
The money made of any metal such as gold, silver etc is called metallic money. It exists in the form of coins. In our country the coins of Rs. 1, 2 and 5 are the current examples of metallic money. Due to its weight, it is difficult to use this money in large quantity.
Therefore coins are used in small amounts only the metallic money has the following two types:
A) Full Bodied Coins
B) Token Money
A) Full Bodied Coins
When the face value of the coin is equal to the value of metal contained in the coin, the coin is called a full bodied coin. The gold and silver coins of old times are examples of full bodied coins.
B)Token Money
When the face value of a coin is greater than the value of the metal it contains, it is called token money. In our country, all the coins are token money.
2. Paper Money
Paper money refers to notes of different value made of paper which issued by the central bank or government of the country.
The paper money can be classified into following types:
A) Representative Money
B) Convertible Money
C) Inconvertible Money/fiat Money
A) Representative Money
Representative money is that money which is fully backed by equal metallic reserve. The holder of a bank note can easily get it converted into metallic (gold & silver) form on demand
B) Convertible Money
It is the form of money which can be converted into gold, silver i.e. metallic reserves. But all these notes issued by the government are not fully backed by gold. The amount of gold kept by the government is a particular proportion of the notes issued.
C) Inconvertible/Fiat Money
Inconvertible or fiat money is one that we have in our pocket and use in daily business. The face value of such money is more than the value of the paper. e.g. the value of the paper of 100 rupee note is almost nil but its purchasing power is equal to Rs.100. it has this value because it has been declared as legal money by the government, so it is generally accepted as a medium of exchange.
3. Bank Money
This is the most modern form of money this money is also called credit. It only consists of cheques, bill of exchange and drafts.
A) Cheques
A cheque is an unconditional order by the client on his bank to pay a certain sum of money to him or to any other party.
B) Bills of Exchange
A bill of exchange is an order by the drawer to the drawee to pay a sum of money to the drawer or to any other party.
C) Draft: Draft is a cheque drawn by a bank on its own branch or the branches of another bank requesting it to pay on demand a specific amount to a person named on it.
4. Legal Tender Money
The money that a person accepts as a means of payment and in discharge of debt is called legal tender notice. All the notes and coins issued by the govt. and the central bank are legal tender money. Legal tender money is of two types:
A) Limited Legal Tender Money
The money which can be used a means of payment up to a certain limit is called limited tender money e.g. coins.
B) Un-limited Legal Tender Money
The money that can be used a mean of payment up to any limit or amount e.g all the notes issued by SBP.
Non legal tender money
Bank money is the form of cheques, bills of exchange, a promissory notes is not legal tender money. Robertson says it “optional money”. So non legal tender money is money which a person may or may not accept as a mean of payment.
5. Plastic Money
Plastic money means the credit cards, smart cards. Plastic cards which have specially printed set of characters. Recently the use of this money has increase.
6. Near Money
A type of money which can easily be converted into money. It included deposits, government bonds, printed bonds etc.
