Types of Money: Here, the clarification about the money and their types are detailed. The types of money properties, usage of money, and difference of types of money are mentioned here. Knowledge about hard and soft money, the history, and functions of types of money, and their locality are also detailed here. Some basic characteristics of types of money are noted here. It is very useful for the students who prepare for bank and other government exams. Finally, some of the basic FAQs about types of money are answered here. 

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About Money

Money is a thing that is most commonly accepted to exchange goods and other products. The term “CURRENCY” refers to the paper notes (or) aggregate coins. The standardized currency is produced by the government as a monetary unit. There are almost 180 different types of money around the world according to research done by the United Nations. The oldest currency called as “POUND” used by the British is still in use. The standardized currencies are produced in India by the RBI which is the Reserve Bank of India.

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Types of Money

Economists use various types of money around the world nowadays. I.e.,

1. Commodity Money
2. Commercial Bank Money
3. Fiat Money
4. Fiduciary Money
5. Metallic Money
6. Paper Money
7. Representative Money

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Types of Money - Commodity Money

Commodity money was used historically. It is linked to a barter system that directly exchanges goods and services for other goods and services. It was the easiest and oldest types of money which has a storage value. It works as a source of exchange and unit of account. Many people and governments accepted it as a medium of exchange. The actual value of the commodity itself describes the value of the commodity. It is a physical asset that has an intrinsic value eg., Gold coins, shells, beads, etc., Nowadays most governments changed from this money to fiat currencies.

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Types of Money - Commercial Bank Money

Fractional reserve banking created commercial bank money. This claims against the financial entities which is utilized to buy goods or services. Fractional Reserve Banking is the commercial banks provide loans which is greater than real money. If the financial institution becomes insolvent, the claim will not be fulfilled. Immediately upon the demand, banks have the legal obligation to return the funds. This types of money plays a vital role in any financial system.

Types of Money - Fiat Money

Fiat money’s face value is decided by the government which has more than its real value. The actual value of this type of money is worthless. It is issued across the world based on the economic strength of each government issuing the fiat money. It allows the government to conduct economic policy based on increasing or decreasing the money supply. The Federal Reserve and the treasury department of US., monitor the money supplies in the United States. This types of money has the purpose of regulating and mitigating monetary issues. This type of money is used in any kind of commodity or paper money which can also be used as a medium of exchange. The International Monetary Fund (IMF) and the World Bank serve as a watchdog all around the world for exchanging international currencies.

Types of Money - Fiduciary Money

Fiduciary money is commonly considered as a mode of exchange known for its value of confidence. It is a substitute for money that is often given as a written statement that has an intent of payment. It is also not considered as a legal tender by the government like fiat money. For example., Bank notes, drafts, and cheques. The parties used the fiduciary money as like regular fiat or commodity money after gaining the confidence that the assurance wouldn’t be broken. Because there is always risk in the exchange of fiduciary money system.

Types of Money - Metallic Money

Metallic money is used in both ancient as well as in current times. The money made of metals is called as the metallic money. For example., Gold, silver, bronze, and nickel. The King Midas of Lydia is the one who invented the metal coin in the 8th century BC. Gold or silver is mainly used to determine the standard value of the money. The value of this money in exchanging goods is equivalent to their actual or intrinsic value. It is also categorized into full-bodied coins and token coins.

Types of Money - Paper Money

Paper money is found and used in order to replace metallic money. This is the money which was issued by the government as bank notes to exchange goods. In Europe, it was introduced in Sweden in 1661. It is acceptable which inherit the characteristics of token money without the reference to that metallic equivalent. The invention of paper money has been started in premodern China. No country in the world has a gold or silver standard currency system. In Europe and America, this types of money was held under suspicion because the printing of paper money was associated with wars (both battle and civil) and also for maintaining the army.

Types of Money - Representative Money

In this representative money, at a fixed rate, all token or paper notes are converted into full-bodied coins like gold, silver, etc., In 1927, this types of money was adopted in India. At that time, Rupees and coins were easily converted into gold. In 1875, British economist, William Stanley Jevons described this types of money. It is involved in direct and fixed relation to the commodity that backs it.

Properties, Usage, and Difference

The money should be fungible, durable, portable, recognizable, and stable. The fungible is the term refers to the quality that allows one thing to be exchanged. It will be less durable for future transactions. All types of money should be easy to carry and need to be of better quality. The users can easily agree to the terms of exchange. Money should be relatively stable and constant to prevent fluctuations. It is used as a unit of account, as a store value, and it should be in the standard of deferred payment. The types of money are simply differentiated by market determination and also the money issued by the government.

Hard and Soft Money

The hard money is based on a valuable commodity such as gold or silver and it's also less susceptible. The soft money is raised by the national and state parties and also the money comes from large individual and PAC contributions.

History, Functions, and Locality

The Barter method is used in ancient history which can be around 100,000 years ago. The Scientist, Herodotus, mentioned the Lydians were the first people to introduce the use of gold and silver coins. After that many cultures had been developed by commodity money. Then it was followed by the development of representative money. The bank note “Jiaozi”, was first used in China. It was first issued in Europe by Stockholms Banco in 1661. In the early 20th century, all countries adopted the gold standard. By modern money theory, fiat money is also backed by taxes. Money is used as a unit of account which is used to balance the budget and also easily shows the profit and loss. The main function of all types of money is to engage in transactions and also for future savings. Almost in most of countries, the government itself encourages particular forms of money used for taxes and to find fraud. The community can change the money on a smaller scale known as currency substitution, which can be money or currency that does not have to be issued by the government. 

Types of Money - FAQs

Q: How many types of money are explained here?

Totally 7 types of money are explained here.

Q: Which bank issues the currency in India?

The Reserve Bank of India (RBI) issues the currency in India.

Q: How does the Barter system work?

It works basically on the direct exchange of goods or services for other goods or services.

Q: Which is the oldest money?

The “Pounds” are the oldest money used by the British which is still in use.

Q: Whether this topic is useful for government exams?

Yes, this is one of the knowledgeable topics useful for government exams in India.