2. Metal Pieces as Money:
Inadequacy of commodity money led to evolution of metallic money. Pieces of copper, brass, iron, silver and gold substituted for commodity money with the passage of time.
The problem of uniformity of weight, purity and fineness of precious metals to serve as money led to private and state coinage.
Private coinage was done by goldsmiths who stamped their seals on pieces of metals as a mark of quality and quantity of precious metals used in coinage. State coinage is believed to have been innovated by the king of Lydia during 560-546 BC. Exact time of state coinage in India is not known but historical evidence shows that official coins were in circulation around 400 BC.
Coins issued have been of two types—standard coins and token coins. Standard coins are full bodied coins. A full bodied coin is one whose intrinsic value is equal to its face value. Intrinsic value refers to the value of the metal the coin is made of and the face value refers to the value marked on the face of the coin.
Standard coins enjoyed free coinage and were treated as unlimited legal tender. By free coinage we mean freedom to people to get their precious metals converted into coins from the mint and by unlimited legal tender we mean its unlimited acceptability as legal money by all at its face value.
Standard coin has served as a principal coin. Token coin, on the other hand, has lacked free coinage and has served as a limited legal tender. It has therefore served as a subsidiary coin only. Token coins, not being full bodied, lacked people’s confidence due to inferiority of metals used in their coinage.
Let us come to the question whether Indian rupee is a token coin or a standard coin. Before 1893, Indian rupee used to be a standard coin. It was a full-bodied coin made of silver with its face value at par with its intrinsic value.
It also enjoyed free coinage and the status of an unlimited legal tender. Thereafter, it transformed into a token coin with the use of inferior metals in its manufacture. Its intrinsic value dropped much below its face value and it lost its status as an unlimited legal tender. Even the provision of free coinage was withdrawn.
Today, it possesses some features of a standard coin and some of a token coin. It is thus known as a standard token coin. Withdrawal of the provision of free coinage and the status of unlimited legal tender make it a token coin but rapid erosion of its face value and appreciation of its intrinsic value due to inflation make it a full-bodied coin. Hence, it is neither a pure standard coin nor a pure token coin. It is a blend of the two.
3. Paper Money:
Evolution of paper money traces its origin perhaps to the paper chits or receipts issued by goldsmiths to individuals as an acknowledgement or receipt of precious metals and other valuables for safe custody.
Later, banks substituted for the goldsmiths and their promissory notes substituted for the goldsmiths’ chits or receipts. Initially, these promissory notes were convertible into precious metals at will and were known as the convertible paper money or convertible currency.
Evidently issue of convertible paper money required the issuing authority to maintain metallic reserves to back it up. When such backup to paper currency does not exist, the paper money is called the inconvertible paper money or the inconvertible currency.
Convertibility of currency into precious metals had been withdrawn by the nation-states when their currency requirements exceeded much beyond the stocks of the precious metals possessed by them. This exempted the monetary authority from the compulsion of maintaining matching bullion reserves at the time of issuing currency.
Paper money was introduced in 9th century. The first country to use paper money was China. However, use of paper money on a large scale began in 17th and 18th centuries. In India, it started in the 19th century.
It was the Bank of Bengal that first issued the paper currency in 1806 in India. Paper money is classified under four heads: (1) Representative Paper Money or representative full bodied money which is fully backed by gold and silver reserves; (2) Convertible Paper Money which can be converted into standard coins or bullion at will but metallic reserves maintained are less in value than the value of currency issued; (3) Inconvertible Paper Money which is not backed by any guarantee to convert it into standard coins or bullion; and (4) Fiat Money which is inconvertible paper currency issued only at a time of crisis.
4. Deposit Money:
With the evolution of commercial banking, another form of money called the deposit money or chequable deposits gained ground. Commercial banks promise to honour the depositors’ cheques up to the balance available in their deposit accounts with the bank.
5. Near Money or Quasi-money:
Instruments such as credit cards are known as near money. They are not as good as cash or currency (money proper) in making transactions but are quite close being that. Credit cards are widely used by people while shopping.
They serve as good as money in that regard. But shopping with credit cards proves costlier to the shoppers due to transaction fee charged by the bank of issue. Moreover, use of the credit cards is not common everywhere.
One can’t use credit cards to buy vegetables and groceries from vendors nor can one use such instruments to pay the maid servant for her services. One can’t buy a pencil or an eraser through it nor can one pay for the use of local transport such as taxi, rickshaw or local bus. That is, one can’t make payments through it in small amounts.
We need cash (money proper) for such transactions. Thus, credit card is not a perfect substitute of money proper. It is only a close substitute and hence is known as near money or quasi-money. Other instruments serving as near money are time deposits, treasury bills, bonds, debentures and bills of exchange.
A bill of exchange represents a promise to pay a fixed amount of money at a specified point of time in future. It can also be encashed earlier through the discounting process of a commercial bank.
A treasury bill is a promise of the government to pay a specified amount to the bearer after a specified period of time, usually 90 days of the issue of the bill.
Likewise, bonds and debentures represent instruments of long-term borrowings of government and commercial concerns. Even these instruments can be converted into money proper through the discounting process of the commercial banks.
Credit cards impart liquidity to the holders at specified establishments. Expenditure of people is thus no longer limited to the stock of cash (money proper) possessed by them. Instead, it extends to include near money as well.
Near money differs from money proper in two respects—first, it can’t function as a medium of exchange without general acceptability and second, it has a cost to function as money which the holder has to bear in the form of transaction fees and the annual charges in respect of credit cards and discounting charges in respect of other instruments of near money.
6. Legal Tender Money:
Money that has a legal sanction behind it is known as the legal tender money. It has to be accepted by all. It is called limited legal tender when no one can be forced to accept it beyond a certain limit. For example, coins of certain denomination can’t be forced on anybody beyond a certain amount at a point of time. On the other hand, money, which a person has to accept up to any limit, is called the unlimited legal tender.
7. Optional Money:
That form of money which is ordinarily accepted by people, even though there is no legal obligation to do so, is called the optional money.
Accepting payments through the modes of cheques, hundies and bills of exchange is a normal practice in day-to-day business but if a recipient refuses to accept them, there is no legal provision to compel him/her not to do so.
In other words, it is the recipient’s discretion to accept or reject such modes of payment. No one, on the other hand, can refuse to accept a payment if it is made in currency, the legal tender of the nation.
8. Fiat Money:
Fiat money, also called the emergency currency, is a form of inconvertible paper money, issued generally at a time of crisis. It does not require maintenance of any kind of reserves behind it. Monetary authorities have to give no assurance to convert it into any metal or metallic coins.
Imposing no compulsion of a cover on the monetary authorities, it is quite tempting to issue fiat money whenever in crisis. The risks that put a restraint on its issue are mainly twofold—first, it does not enjoy the confidence of public and second, its issue entails the danger of inflation. If issued in controlled quantities, it can stimulate economic development in underdeveloped countries.
9. Credit Money:
Credit money refers to money whose intrinsic value is less than its face value. The face value of a hundred rupee note is Rs 100 but its intrinsic value is the value of the paper of which it is made. The value of the paper is much less than the face value of the currency note.
Forms of money, such as deposit money, currency notes, token coins, representative token money and the like, for which, the value of the commodity they are made up of or the value of bullion they are backed up with, both falling short of their face value, provide examples of credit money.