Professor Crowther defines money as “anything that is generally acceptable as a means of exchange, and at the same time, acts as a measure and a store of value.” Initially in our country, notes and coins issued by Reserve Bank of India and Ministry of Finance, Government of India (one rupee note is issued by Ministry of Finance, Govt. of India) is treated as money.
These are called legal tender money or common money because there is a legal sanction behind such notes and coins. Anybody who refuses to accept them is punishable by the court of law. In modern times money consists of (a) legal tender money (that is coins and currency notes) and (b) bank money (that is demand deposits).
(A) Legal Tender Money and Optional Money:
Legal tender money is of two types:
ADVERTISEMENTS:
(i) Limited legal tender and
(ii) Unlimited leagal tender.
Image Source: shareyouressays.com
(i) Limited legal tender:
ADVERTISEMENTS:
Limited legal tender money is accepted as legal tender only upto a certain limit. For example, in India 10, 20, 25 paise are legal tender only upto a sum of Rs. 25/-. It means up to rupees twenty-five a person cannot refuse a payment through this small coins. So 10, 20, 25 paise coins are examples of limited legal tender.
(ii) Unlimited legal tender:
Unlimited legal tender is that money which has to be accepted as a means of payment upto any amount without any limit. For example, in our country, 50-paise coins, one rupee coin and currency notes of all denominations are unlimited legal tender.
In our country, we have a concept of optional money. Optional money is that money which may or may not be accepted as a means of payment. There is no legal sanction behind them. Different credit instruments like, cheques, bank drafts, etc are examples of optional money.
(B) Money of Account and Money Proper:
ADVERTISEMENTS:
1. Money of Account:
J.M. Keynes has distinguished between money of account and money proper. Money of account is the description or the title and money proper is the thing which answers to the description. Money of account is that in which accounts are maintained.
Prices of goods and services, general purchasing power, debts etc are expressed in terms of money of account. Rupee in India, Dollar in USA, and Yen in Japan etc are the examples of money of account.
2. Money Proper:
Money proper is otherwise known as actual money. Money proper is the money which is in circulation in a country. It is the medium of exchange and means of payment.
Rupee note and rupee coin are the actual money because transactions and payments are affected through them. Money of account may change but money proper does not change.
During economic crises money of account and money proper may not be same. After First World War, in Germany, the money proper continued to be the German Mark (like rupee in India, it is German Mark in Germany), but the money of account changed to the American Dollar because of its stable value as compared to depreciating Mark (Mark – The Germany Currency).
(C) Metallic Money:
The development of money from one form to another has been historically traced. Money has passed through different stages with the passage of time and growth of human civilisation. Initially, metallic coins were made of metals like gold, silver, copper, nickel etc. Metalic money is of two types:
(i) Standard or full-bodied money and
(ii) Token money
(i) Standard or full-bodied money:
Any money whose face value (exchange value) is equal to its intrinsic value (the worth of the metallic content of money) is called standard money. Full-bodied money requires the fulfillment of two conditions:
(a) Money can be shifted from monetary to non-monetary uses without any cost; and
(b) The metal can be coined into money without limit and without cost. There is free coinage of standard money and the mint is open to the public. It is unlimited legal tender and money of account of a country. Standard coins are generally made of gold and silver.
(ii) Token money:
The money whose face value is more than its intrinsic value is called token money. They are made of cheaper metals, like, copper, nickel etc. It is minted by the government and there is no free coinage of it. Token money is limited legal tender.
(D) Paper Money:
It consists of notes and coins issued by Central Bank (or Reserve Bank) of a country and Ministry of Finance, Govt. of India (one rupee note is issued by Ministry of Finance, Govt. of India). Paper money is of four types: (a) representative paper money, (b) convertible paper money, (c) inconvertible paper money and (d) fiat money.
Representative paper money is fully backed by gold and silver reserves. The paper money which is convertible into standard coins is called convertible paper money. In this case the individuals can get their paper money converted into cash.
Here the value of metallic reserves is less than the value of the notes issued. In this case the reserves consist of some amount of gold, silver and standard coins, approved securities.
The paper money which is not convertible into standard coins or valuable metals is called inconvertible paper money. There is no guarantee to convert the paper currency into gold and silver.
Fiat money is one variety of inconvertible paper money. This money is neither backed by metallic reserves nor by fiduciary reserves. Under this there is a danger of over-issue.