Important classifications of money are explained below

Broadly speaking, three main types of money exist in a modern economy: (a) metallic money, (b) paper money, and (c) credit money. Economists, however, further classify them into many other forms. Important classifications of money are explained below:

(A) Money Proper and Money of Account

Keynes distinguished between money proper and money of account by saying that,” the money of account is the description or title and money is the thing which answers to the description.

Money proper or actual money is the money which is in circulation in a country. It is the medium of exchange and means of payment. In India, for example, the Rupee note and the Rupee com are the actual money because different types of transactions and payments can be made through them.

Money of account is that in which accounts are maintained. Prices of goods and services, general purchasing power, debts, etc. are all expressed in terms of money of account. Normally, the money proper and the money of account are the same.

For example, Indian Rupee acts both as the medium of exchange and the money of account. But, sometimes, the two may be different, particularly at a time of economic crises.

For example, after the World War I, in Germany, the money proper continued to be the German Mark, but the money of account changed to the American Dollar because of its stable value as compared to the depreciating Mark.

Similarly, while the Indian Rupee as the money of account has remained the same, the actual Indian Rupee has been experiencing change in its weight, size and content from time to time.

(B) Commodity Money and Representative Money

Money proper or actual money is further divided into commodity money and representative money. Commodity money is mad of certain metal and its face value is equal to its intrinsic value.

It serves not only as a medium of exchange, but also as a store of purchasing power. It is also called full-bodied money because its value is materially equivalent to that of its component stuff.

The money proper in circulation which is not full-bodied is called representative money. It is money whose value is materially greater than the value of the stuff of which it is composed. Paper currency notes are an example of representative money.

Representative money may be convertible or inconvertible. It is convertible if the issuing authority is under the obligation to convert it into commodity money. It is inconvertible if the issuing authority is under no obligation to convert it into commodity money.

(C) Legal Tender and Optional Money

On the basis of acceptability, money has been classified into legal tender and optional money. Legal tender money is enforced by law. No one can refuse to accept it as a means of payment.

Legal tender money may be of two types: limited legal tender and (b) unlimited legal tender. Limited legal tender money is accepted as legal tender only up to a certain limit.

For example, in India, the small coins of 1,2,5,10 and 25 paise are legal tender only up to a sum of Rs. 25. That means up to Rs. 25 a person cannot refuse a payment through these small coins and beyond Rs. 25 he is free to refuse these coins.

Unlimited legal tender is that money which has to be accepted as a medium of payment up to any amount. For example, in India, 50-paise coins, one rupee coin and currency notes of all denominations are unlimited legal tender.

Optional money is that money which may or may not be accepted as a means of payment; it has no legal sanction. Different credit instruments, like, cheques, bank drafts, etc., are the examples of optional money. No one can be forced to accept them.