Money – Types and definitions
H Money/ High Powered Money – It refers to the monetary base or base money in the country. It includes (i) currency held by the
people, (ii) cash reserves of the commercial banks with the RBI and (iii) vault cash of commercial banks (cash kept by the banks in
their vaults for day to day cash requirements)
Fiat Money – Money backed with the authority of the government. Its face value > its real value. Paper currency is an example of fiat
money
Fiduciary money - it is money backed with the mutual trust between the payer and the payee, eg cheques. Fiduciary money includes
banknotes and digital currencies such as credit card and electronic fund transfer.
Commodity money – Whenever a commodity is used for exchange, the commodity becomes equal to money and is called
commodity money. This system is associated with bartering, where there is no standardised or agreed-upon medium of exchange.
Eg Gold
Paper Money- the banknotes issued by the Central Bank. Paper money is generally accepted in daily transactions as a mode of
exchange for goods and/ or services. Bill of exchange and cheques are also considered as paper money.
Metallic money: Pieces of metals like gold, silver, bronze, and copper came to be used as money in both ancient as well as current
times. It can be classified as metallic money.
Representative Money: All token coins and paper notes that can be readily converted into full-bodied coins or equivalent bullion
(gold, silver, etc.) at a fixed rate, are known as representative money. Such a kind of money was accepted in India in 1927 when
rupee notes and coins were easily able to convert into gold.
Credit money is a monetary value created out of a future obligation. For example, this can be an IOU, a loan, a credit card, bonds or
money markets.
Full bodied money – refers to money in terms of coins, whose commodity value is equal to the money value as and when the coins
are issued. For eg- during British period, value of gold coins when minted was equal to the value of the gold in the gold coin
Credit money – it the money where the money value (face value) is greater than its commodity value (intrinsic value ). Eg. Notes, all
coins issued currently. The value of the metal in the coin is far less than the face value (amount printed on the coin)
Bank money – It is the money created by the commercial bank in the form of demand deposits over and above cash deposits of
people with the bank (through the process of credit multiplier)
Near Money: A type of money which can easily be converted into money. It included deposits, government bonds, printed bonds
etc.
Legal tender: Money can be classified as limited legal tender and unlimited legal tender
(i) Limited legal tender: it is that money which no person can be forced to accept beyond a particular limit fixed by law.
In India, accordingly, 50 paise coins can be used as the legal tender for dues up to Rs 10.
(ii) Unlimited legal tender: Unlimited legal tender is that money which a person has to acccept without any legal limit.
In India ₹1.00 coins, 50 paisa coins and paper notes of all denominations are unlimited legal tender
Qs: Why money is demanded?
Transactional demand for money - is money people hold to pay for goods and services they anticipate buying. When you carry
money in your purse or wallet to buy a movie ticket or maintain a checking account balance so you can purchase groceries later in
the month, you are holding the money as part of your transactions demand for money.
Precautionary Demand for Money - The money people hold for contingencies. Eg, money held for possible home repairs or health-
care needs.
Speculative demand for money - money held in response to concern that bond prices and the prices of other financial assets might
change. In other words, it is the demand for money to take advantage of investment opportunities that may arise in future.
