Forms of Money Chapter No 2

Terms to Known 1 Metallic Money 2 Paper Money 3 Kinds of Paper Money 4 Advantages & Disadvantages 4

Amazing Facts If you had 10 billion $1 notes and spent one every second of every day, it would require 317 years for you to go broke. There is about $823 in circulation for each person in America. The $100 note has been the largest denomination of currency in circulation since 1969. The largest bill ever printed was the $100,000 bill; it was actually a Gold Certificate issued in 1934. These notes were used for transactions between Federal Reserve banks and were not circulated among the general public. President Woodrow Wilson was depicted on the bill.

Dollar paper money life Span Denomination life 1 22 months 5 2 yeas 10 3 years 20 4 years 50 9 years 100

Metallic Money It consists of coins, made of gold, silver, copper or nickel. It varies in weight, fineness and value. Metallic money is in full bodied money or token money.

Full Bodied Money The Full bodied money is that whose face value is equal to its intrinsic value of metal. Govt. retains a monopoly of the issue of full bodied coins. Full bodied money also called standard Money

Token Money It is subsidiary money. Its face value is higher than its intrinsic value. Its generally limited legal tender money. Issuance of token money depends upon the needs of the people.

Subsidiary ،تابع Money Subsidiary money is to assist the token money. All coins of the denominations from 5 Paise to 25 paise. Such coins are limited legal Tender.

Legal Tender Money Any means of payment which has state’s sanction (Approved) behind it and a debtor can legally compel his creditor to accept in settlement of dues, is called legal tender money. It is of two kinds: Unlimited Legal Tender Limited Legal Tender.

Unlimited Legal Tender Unlimited legal tender money is one in terms of which debts can be legally paid up to any amount. In Afghanistan the currency notes of Afn. 10, Afs. 20, Afn. 50, Afs. 100Afn etc.

Limited Legal Tender Limited legal tender money is that which a creditor can accept in settlement of claims up to a certain limit only. For example Mr. A owes Mr. B Afn. 1321 only to be paid, so Mr. B may pay in following denominations: Afn. 1000 x 1, Afn. 100 x3, Afn. 20 x 1 and coin of Afn. 1 x 1 Afn. 500 x 2, Afn. 50 x 6, Afn. 10 x 2 and coin of Afn. 1 x 1. But A may Refuse to accept Coins Afn 5 x 264 and Afn 1 x1.

Paper Money Paper money refers to note of different denominations made of paper and issued by the central bank or Government of the Country.

There are three kinds of Paper money: Representative paper money Convertible paper money Fiat paper money

Representative paper money It is that money which is fully backed by equivalent metallic reserves. The holder of the bank note can easily get it converted in standard metal money on demand.

Convertible paper money Paper money which carries a promise by the issuer that the paper can be converted into the standard money metal at some future date. The state or the central bank which issues convertible paper currency does not keep 100% of metallic reserve. Some part of the total supply of convertible paper money is fully backed by the standard metal money is known as Covered issue.

The main characteristics of convertible paper money are (a) The individuals can get their paper money converted into cash, (b) The paper money is backed by gold and silver reserves. But, on the assumption that all the currency notes are not simultaneously presented by the public for encashment, the value of metallic reserves is less than the value of the notes issued, (c) The reserves comprise of (i) metallic portion containing gold, silver and standard coins, (ii) fiduciary portion containing approved securities

Specimen:

Fiat money (inconvertible paper money) It is that money which is not redeemable or convertible into gold or silver on demand. It is accepted because it has been declared legal tender by the issuing authority and has general acceptance as a medium of exchange. The intrinsic value of fiat money is nil.

Cont…. Fiat money in the words of Keynes is that which is created and issued by the state but is not convertible by law into any thing other than itself and has no fixed value in terms of an objective standard.

The main characteristics of the fiat money are: (a) It has significantly less intrinsic value than its face value, (b) It is not convertible into any valuable asset, (c) It is accepted in transactions at face value because it is unlimited legal tender.

Fiat money also has certain demerits: a) The danger of over-issue of fiat money (or inflation) is always present in a system of fiat money, (b) It lacks public confidence as it is not backed by metallic reserves, (c) Foreign exchange rates are liable to wide fluctuations under fiat money system because fiat money is not linked with other country's money through gold.

Merits of Paper Money 1. Economical 2. Elasticity of money supply 3. Promotes economic growth 4. Internal price stability 5. Helpful in emergency 6. Regulation of exchange rates 7. Uniform quality

Economical Under paper standard, the central bank has not to keep gold or silver for issuing of the paper notes. The cost of printing paper notes is also very small. It is thus, most economical form of monetary standard.

2.Elasticity Of Money Supply As the money supply is not backed with gold or silver, therefore, the monetary authority can easily manage its supply according to the requirements of trade and industry in the country.

3.Promotes Economic Growth Under paper standard, the monetary authority is free to determine its monetary policy. It therefore regulates the money supply in such a way that productive resources of the country are utilized to their maximum and greater economic growth achieved.

4.Internal Price Stability Under paper standard, the monetary authority can maintain stability in internal price level by making necessary expansion or contraction in money supply according to the economic conditions.

5.Helpful In Emergency Paper money is also useful in times of war when huge funds are needed to finance it. It is also helpful to meet any financial crises. The monetary authority by expanding or contracting the money supply achieve this objective.

6.Regulation Of Exchange Rates Under paper standard, the international exchange rates are fixed by purchasing power of the respective countries. Paper currency is an effective and automatic regulator of exchange rates between the countries.

7. Uniform quality The paper money has a uniform quality and the holder least bothers for possession of new money coins. With the use of paper money, the loss of precious metals due to wear and tear is also solved.

Demerits of Paper money Danger of inflation Exchange rate instability Dangers of mismanagement Fear of demonetization Use within the country

1. Danger of inflation Under paper money, the increase in money supply is not difficult because it requires no backing of gold or silver. The government of the country, to cover the deficit financing, over issues paper currency. This results in inflationary rise in prices with all its evil effects.

2. Exchange rates instability Under paper standard, there are also wide fluctuations in the foreign exchange rates. The internal prices do not move in line with the external prices. As such external instability arises which directly effects the foreign trade.

3. Dangers of mismanagement Paper standard is useful only when it is efficiently managed. If the monetary authority is not vigilant and does not issue the paper currency as required, it often leads to inflation or deflation.

4. Fear of demonetization The paper money has no intrinsic value of its own. The monetary authority also does not promise to convert it into precious metal. If the government at any time orders the demonetization of the currency, And the holders of the demonetized notes fail to deposit these notes in times, they have then no value.

5. Use within the country As the intrinsic value of paper money is zero, it can only be used in the country issuing it. Outside the country only stable paper money has the value.

Thank You !