Money can be classified on the basis of relationship between the value of money and value of money as a commodity. Value of money means the face value of money.
For example, the face value of five rupees coin is five rupees. Value of money as a commodity means the value of the commodity of which money is made of. For example, the commodity value of money of a five rupee coin is the cost of material (metal) used of which the coin is made.
If face value and commodity value of coin are the same, it is called standard coin. On the other hand, if face value is greater than the commodity value of coin, it is called token coin. These days, coins are token coins.
Categories of Money:
1. Commodity (full-bodied) money:
Commodity money is that whose face value is equal to its commodity value. This type of money was in existence when gold standard was prevalent. In other words, face value of the coin was equal to its intrinsic (commodity) value. But now this kind of money is not to be found anywhere in the world.
2. Representative (full-bodied) money:
Though in spirit it is like the commodity (full-bodied) money but in form it is different. This kind of money is usually made of paper but equal to the face value of the money gold is kept in reserve. This money saves the users from the inconvenience of carrying money in heavy-weight in case of large quantity because paper money can be conveniently carried.
3. Credit Money:
It is that money whose value of money (face-value) is greater than the commodity value (intrinsic value) of money. Token coins and promissory notes are part of credit money. Besides these, there are other forms of credit money also. Various forms of credit money are the following:
(a) Token coins:
Token coins are those whose face value is more than their intrinsic value. In India, coins of the money value of Rs. 5, Rs. 2, Rs. 1, 50 P, 25 P, 20 P, 10 P and 5 P are token coins.
(b) Representative Token Money:
This is usually of the form of paper, which is in effect a circulating ware house receipt for token coins or an equivalent amount of bullion thus is backing it. Not only this, the coin or bullion backing the representative token money is worth less as a commodity than as money.
(c) Promissory Notes issued by Central Banks:
This is a major component of currency. It includes currency notes of all denominations issued by Reserve Bank (excluding on rupee note). The system governing note-issue in India is the Minimum Reserve System. Minimum Reserve System stipulates that a minimum amount is kept in reserve in the form of gold and foreign exchange. This means our currency is inconvertible.
(d) Bank Deposit:
Demand deposits (current and saving deposits) are the bank deposits which can be withdrawn on demand. One can withdraw bank deposits at any time through cheques. However, bank does not keep 100% reserves to meet the withdrawal of demand deposits and hence these deposits are credit money.