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In this article, we will consider what types of money are, what their essence is, consider some examples, and also trace the evolution of the types of money.

The main types of money

Globally, there are two main types of money:

  1. Valid money, i.e. money, the denomination of which corresponds to their real (intrinsic) value. An example of this type of money is money in the form of bars and coins made by gold (see Gold Standard). The overwhelming majority of the monetary systems of the early eras functioned on the basis of real money (see Forms of money and their evolution).
  2. Fiat money, i.e. money, the real value of which, as a rule, is significantly lower than their face value. For example, the cost of making a $ 100 bill is less than 10 cents. Fiat money is the backbone of all modern monetary systems.

Money arose at a certain stage in the development of society (see The Origin of Money), when a certain intermediary commodity emerged in the process of exchange, which began to play the role of a universal measure, or, so to speak, the equivalent of the value of exchanged goods. This is how the historically earliest type of money arose – commodity money.

Commodity money

In different historical epochs and among different peoples, various goods and objects acted as money (ie intermediary goods): cattle, grain, salt, tea, tobacco, jewelry, arrowheads and spearheads, there were also quite “exotic” objects , for example, cowrie shells, etc. At a higher level of development of our civilization, the above objects were replaced by precious metals – mainly gold and silver.

Commodity money (they are still quite often called real money, natural money, real money or real money) – this is a type of money, in the role of which a certain commodity acts, which has an intrinsic value and has some utility. Therefore, such a product can be used both as money and directly as a product (according to its main purpose). For example, salt could be used both as money (for carrying out commodity exchange operations) and as a commodity for personal consumption – direct consumption, salting of meat, for skinning, etc.

With the development of exchange, the role of money was entrenched in one commodity – precious metals (gold and silver). This was due to their physical and chemical properties such as:

  • portability (small weight contains great value – unlike, for example, salt);
  • transportability (ease of transportation – as opposed to tea);
  • divisibility (dividing a gold bar into two parts does not lead to a loss of value – unlike livestock);
  • comparability (two gold bars of the same weight have the same value – unlike furs);
  • recognizability (gold and silver are easy to distinguish from other metals);
  • relative rarity (which provides precious metals with a fairly high value);
  • wear resistance (precious metals do not corrode and do not lose their value over time – unlike furs, leather, shells).

There were different types of monetary systems based on precious metals in different countries:

  • monometallism (when only one metal was used as money – either gold or silver);
  • bimetallism (when both metals were used as money).

Initially, precious metals were used in the form of ingots. The exchange service required constant weighing and dividing of ingots. Therefore, in the 7th century BC. in ancient Rome, in the temple of the goddess, Coins began to be flattened, the weight of the metal was set and a portrait of the ruler was minted. This is how the first coins and money circulation based on coins appeared.

Although commodity money has long gone out of use, at the moment, under certain conditions, some goods continue to function as money. For example, in prisons, prisoners have such a commodity as cigarettes, in places of hostilities, weapons and ammunition can be used as money, during severe economic crises – sugar, salt, tea, matches, etc.

Commodity money went out of circulation due to the fact that it had a number of shortcomings. As a rule, these are:

  • non-portable (non-compact): took up a lot of space (large volume) – inconvenient during storage;
  • heavy – inconvenient during transportation;
  • indivisible (for example, live cattle);
  • deteriorate during storage;
  • too expensive to manufacture (since the real value of money (goods) must correspond to the nominal value, otherwise such goods will not be able to perform the functions of money);
  • insufficient amount of money (goods) to meet the needs of the country s economy as production grows and the level of economic development.

Currently, the role of commodity money can be investment coins made of precious metals, which have legal tender force within the country.

Types of money
Rice. Types of money

Secured money

Secured money – evolutionarily the next type of money after commodity money. Secured money (also called change money, representative money) is money, which are signs or certificates that can be exchanged upon presentation for a fixed amount of a certain commodity or commodity money, for example, for gold or silver. In fact, secured money is the representative of commodity money.

The emergence of secured money was primarily due to ease of use – convenience and greater safety of transportation, the absence of real damage and erasure of gold in the process of circulation.

It is believed that the first secured money appeared in Ancient Sumer, where figurines of sheep and goats made of baked clay were used for payment. These figurines could be exchanged upon presentation for live sheep and goats.

Initially, banknotes certified the presence of an appropriate amount of a full-weight coin and were secured money. However, today, after the abolition of the gold standard, banknotes are no longer guaranteed by exchange for a fixed commodity, so this type of money as “secured money” has turned into a new type of money – “symbolic money” (or “fiat money”), retaining the previous name.

Fiat money

Fiat money (they are also called symbolic money, paper money, decree money, fake money) – this is money that does not have an independent value or it is significantly lower than the face value. On the one hand, fiat money has no value (intrinsic real value), but on the other hand, it is capable of performing the functions of money, since the state accepts it as payment of taxes, and also declares it to be legal tender on its territory.

Today, the main form of fiat money is banknotes and non-cash money in a bank account. At the same time, the concept of “non-cash money” is conditional, since it is essentially about non-cash (non-cash) payments, that is, about settlements between debtors and creditors without using cash. When making payments in cash, the owner of banknotes (banknotes) directly uses them at his own discretion, and in case of non-cash payments, the authorized person makes appropriate demands on the bank, the execution of which no longer depends on him. The same applies to units of value for electronic non-fiat payment systems (a type of electronic money).

As a rule, the emission of money is carried out by the state represented by the central bank of the country. Issuing fiat money generates two types of income: seigniorage and inflation tax. Seigniorage – this is the profit due to the difference in price between the value of the money made and their market, exchange value. Inflation tax – income received by the issuing bank or the state by issuing additional money to finance its expenses. These actions cause inflation, which is why it is customary to call such profit inflationary.

With the proliferation of payment cards and electronic money, banknotes are gradually being pushed out of circulation, especially in developed countries, where the share of cash circulation is insignificant.

Modern types of money
Rice. Modern types of money

Credit money

Modern economic science distinguishes this type of money as “credit money” into a separate group. Credit money – these are the rights of claim in the future with respect to individuals or legal entities, a specially formalized debt, usually in the form of a transferable security, which can be used to purchase goods (services) or to pay your own debts. Payment for such debts is usually made on time, although there are options when payment is made at any time on demand. Credit money carries the risk of non-fulfillment of the requirement.

Examples of credit money are bill of exchange and check.

Credit money arises with the development of commodity production, when the sale and purchase is carried out with payment in installments (on credit). Their appearance is associated with the function of money as a means of payment, where they act as an obligation that must be repaid at a specified time.

A feature of credit money is that its release into circulation is linked to the actual needs of the turnover. The loan is secured against certain types of stocks, and the loans are repaid when the balances of values ​​decrease. Thanks to this, it is possible to achieve a correlation between the volume of means of payment provided to borrowers with the actual need for turnover in money.

Credit money does not have its own value, it is a symbolic expression of the value that is contained in the equivalent commodity. Their release into circulation is usually carried out by banks when performing credit operations. Credit money has gone through the following development path: a bill, an accepted bill, a banknote, a check, electronic money, and credit cards.

There is another system for classifying money: cash and non-cash

Moreover, it is customary to refer to cash not only bank notes and treasury bills, but also such credit money as bills of exchange, checks and banknotes.

Non-cash money includes entries in bank accounts, including plastic payment cards, credit plastic cards and electronic money.

Post Author: Rachel Reinbauer

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