What are the Forms of Money in a Modern Economy?

In the modern monetary systems, there are three forms of money in actual use: (i) Metallic Money, (ii) Paper Money, and (iii) Credit Money.

The first two kinds of money are in the form of currency money and the last one is credit or bank money.

Metallic Money:

Metallic money refers to coins made out of various metals like gold, silver, bronze, nickel, etc. A coin is a piece of metal of a given size, shape, weight and fineness whose value is certified by the State.

The right of minting coins is the monopoly of the State. The department of government minting coins is called the Mint.

Coins are of two types: (i) Standard or full-bodied coins and (ii) Token Coins.

A coin is regarded as a standard coin or full-bodied coin if its "face value" (i.e., the exchange value fixed by the issuing authority and embossed on it) is equal to its "intrinsic value", i.e., the worth of the metallic content of the coin.

In the past, coins made from precious metals like gold and silver were regarded as standard coins and the monetary systems adopting them were referred to as "gold and silver standards."

On the other hand, a token coin refers to a coin having the face value of more than its intrinsic value Token coins are usually made of cheap metals like nickel, copper or bronze.

They are generally of lower denominations. Token coins are issued primarily as a form of subsidiary money which is to be used for small change only. They are useful as a convenient means for the payment of small sums.

Since all types of coins are issued by the state authorities either the Treasury or the Central Bank of the country they are regarded as legal tender.

Legal tender money's acceptability is sanctioned of backed up by law; hence", a refusal to accept it is a punishable offence. Standard coins are, however, unlimited legal tender in the sense that they are acceptable of a means of payment of up to any amount, while token coins are limited legal tender as payments can be made up to a small sum only.

Paper Money:

Paper money consists of currency notes issued by the State Treasury or the Central Bank of the country. In India, one rupee notes are issued by the Minister of Finance of the Government of India, while all other currency notes of higher denominations are issued by the Reserve Bank of India.

In modern era, the use of paper money is widespread owing to its following advantages:

1. Paper money is economical. Obviously, paper is much cheaper than any metal.

2. Paper money economises the use of precious and scarce metals by serving as representative money.

3. It is very convenient to carry paper money from place to place.

4. It is also easy to store paper notes. Currency notes of lakhs of rupees can be stored in a small vault.

5. It is easier to count paper notes than metallic coins.

6. Supply of paper money is easily adjustable as per the need of the economy. Thus, paper money is of great monetary and fiscal advantages to the government.

However, paper money has also some disadvantages such as:

1. There is the danger of over issue of notes as they can be easily printed and their supply depends upon the whim of the government. An excessive money supply may lead to rising prices or inflation thereby reducing the value (purchasing power) of money.

2. Paper money lacks general acceptability if the people lose confidence in the government for one reason or the other.

3. Durability of paper money is much less than metallic money.

4. Paper money can circulate within the domestic economy only. For making foreign exchange payments, paper money is not acceptable unless it is a key currency like the dollar.

But these disadvantages are surmountable and controllable by a proper check. Therefore, paper money is in wide circulation.

Credit Money:

In modern economic societies, with the development of banking activity, along with paper money, another form of convertible money has developed in the form of credit money or bank money.

Bank demand deposits, withdrawal by issuing cheques, have started functioning as money, and cheques are now conventionally accepted as a mode of payment by the business community in general.

It must be noted that a cheque by itself is just a credit instrument. Actually it is the bank deposit behind the cheque that serves as money.

Bank money today constitutes a major part of money supply in advanced countries. In many countries such as America, it amounts to nearly 90 per cent of the total money supply. In poor countries, the proportion of currency money widely exceeds that of bank money.

Indeed, in a modern economy, currency money and bank money together constitute the total stock of money or money supply. Currency money is a legal tender and has general acceptability, whereas bank deposits are conventional money and lack general acceptability.

In fact, though the use of money has become all pervasive throughout the world, certain backward areas are still non-monetised. Barter is, therefore, not completely obsolete. In India, for instance, some Adivasi areas are still unfamiliar to the use of money.