Classification of Money

Money is any object or item which is generally accepted as a mode for payment of goods & services and repayment of loans or debts such as taxes, etc., in a particular nation or country. Money was invented to facilitate trade as the barter system was not able to express the value and prices of goods & services. The term money covers all things like currency notes, coins, cheques, etc., to carry out all economic transactions and settle the claims. As a currency, money circulates from country to country and person to person to facilitate trade. Different stages of money are Commodity Money, Metallic Money, Paper Money, Credit Money, and Plastic Money. 

According to D.H. Robertson, “Anything which is widely accepted in payment for goods or in discharge of other kinds of business obligation, is called money.”

Classification of Money

Money is classified on the basis of the relationship between the value of money as a commodity and the value of money as money. It can be broadly classified as:

• Full-bodied Money
• Representative Full-bodied Money
• Credit Money

1. Full-Bodied Money

Full-bodied money refers to any unit of money, whose intrinsic value and face value are equal, i.e., Commodity Value = Money Value. For example, During the colonial period, 1 rupee coin was made of silver metal and its monetary value was equal to its commodity value.

2. Representative Full-bodied Money

The representative full-bodied money usually refers to money made of paper. The money value of representative full-bodied money is much higher than its commodity value, i.e., Money Value > Commodity Value. Such type of paper money is completely backed by a metallic reserve of gold or silver and can be redeemed by the holder’s choice. For example, for convertible paper receipts, one can exchange the amount mentioned on the paper receipt for an equal value of gold or silver.

Representative Money can be of two types:

(i) Convertible Paper Money: The currency notes that can be freely converted into full-bodied money in the form of gold or silver, at any point of time at the will of the holder is known as Convertible Paper Money. It is not necessary to have 100% backing of gold or silver for the convertible paper money, as the notes in circulation are not presented for conversion at the same time.

(ii) Inconvertible Paper Money: The currency notes or paper money that cannot be converted into full-bodied money at the desire of the holder are known as Inconvertible Paper Money. This kind of representative full-bodied money circulates and commands value. It is because the issue of inconvertible paper money is regulated by the Government. Besides, it does not have any kind of backing of standard coins or bullion. For example, the Indian one-rupee note cannot be converted into full-bodied money and does not have a backing. 

3. Credit Money

The money whose intrinsic value or commodity value is much lower than its face value is known as Credit Money, i.e., Commodity Value<Money Value. For example, the face value of a ₹200 note is Rs 200, but if we sell the note as a paper, we would get a much lower amount. 

Various types of credit money are:

(i) Token Coins: These are the small coins of various values whose money value is greater than commodity value, i.e., Money Value > Commodity Value. Token coins are issued to facilitate the daily requirements of people. For example, 1, 2, 5, or 10 rupee coins are token coins, as their money value is more than their commodity value. 

(ii) Representative Token money: Representative Token Money is the money that is fully backed and redeemable in gold or silver. It is generally in the form of paper whose actual offered market value is less than the value printed on paper notes.

(iii) Circulating Promissory Notes issued by the Central Bank: The currency notes issued by the central bank of India (RBI) are known as Circulating Promissory Notes. These include all currency notes of values, like ₹100, ₹200, ₹500, ₹2000, etc. Each circulating promissory note has the words, “I promise to pay the bearer the sum of ₹ ………. “ printed on it with the signature of the Governor of India. Its money value is greater than the commodity value.

(iv) Demand Deposits in Bank: Deposits are claims of depositors against a bank. The demand deposits can be withdrawn from the bank or transferred to another person by issuing a cheque. Such deposits do not have any kind of backing (gold or silver). The money value of a cheque is much higher than its commodity value. With demand deposits, the risk of carrying a large amount of cash is removed, which makes the transactions convenient and safe.