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BCom 3rd Year Classification Financial Money Study Material notes in hindi

BCom 3rd Year Classification Financial Money Study Material notes in hindi

BCom 3rd Year Classification Financial Money Study Material notes in hindi : Types of Metallic Money Classification of Money or The Bases of Legality Types of Coinage Merits of Standard Coins Demerits of Standard Coins Is India Rupee Token Money Merits of Convertible Paper Kinds of Paper Money ( Most Important For BCom 3rd Year Students )

BCom 3rd Year Classification Financial Money Study Material notes in hindi
BCom 3rd Year Classification Financial Money Study Material notes in hindi

BCom 3rd Year Nature Importance Financial Money Study Material notes in hindi


With the development of civilization significant changes have been noticed in the forms of currencies. In the ancient time the forms of currencies were not as they are today. Long-long ago stone or leather made coins were used. Later coins made of gold and silver also came into existence. Today both metals and paper are being used to make currencies. Plastic currency also has come into fashion.


This classification has been done by a classical economist J.M.Keynes. In the classification of money he has mentioned (i) Actual Money and (ii) Money of account.

(1) Actual Money: The actual money refers to that money which comes in circulation through the medium of exchange. The money used for the storage of purchasing capacity and also for deferred payment is the actual money itself. Rupees/coins for India. Dollar for America, Yen for Japan, Frank for France, Dinar for Iraq and Mark for Germany etc are all the actual currencies for the respective countries.

Prof. Keynes has subdivided the actual money in following two subheadings:

(a) Commodity Money : Commodity money is made up of any metal. So metal money is also an example of commodity money. Usually original value of such money is cither equal or almost equal to its marked value. When marked value and internal value of commodity money is equal, it is called full-bodied money.

(b) Representative Money : Representative money is that money which prevails in the form of medium of exchange but it has no internal value of its own. Circulation of such money either depends on the metallic fund or on the faith of government. Paper money is a suitable example of representative money.

(2) Money of Account : Money of account means that money in which books of account of a country are recorded. It may be possible that the actual money and money of account of a country are different. For example after the World War I the actual money prevailing in Germany was Mark but books of account of all transactions were done in Frank or US Dollars. In India actual money as well as moeny of account both are same i.e. Rupees.

According to Prof. Seligman above mention both types of money is actual money or ideal money. Similarly Prof. Benham termed them as unit of currency and unit of accounting.


On the bases of legality money has been classified into two types:

(1) Legal Tender Money: Legal tender money refers to that money which has been approved by the government and it is recognized through out the country as a source of payment. Since being legally approved no body can deny it from taking or accepting as payments. Paper money and metallic money in India are the examples of legal tender money while cheques, bills of exchange and other creit instruments are not legal tender money.

Legal tender money is also subdivided into two types:

(a) Limited Legal Tender Money: When it is made a compulsion to accept any money to a certain limit, then this money is termed as “Limited Legal Tender Money.” It means no one can be compelled legally to accept the same boyond this limit. For example, a certain limit of payment is fixed for accepting metallic money, and then one can’t be compelled to accept the metallic money for the payment beyond the limit.

(b) Unlimited Legal Tender Money : This is that money which can be used for making payments to any extent. In other words this is that money which has been accepted and used by the public on a large scale. In India all metallic money from 50 paisa coin and beyond, as well as paper money of all value is unlimited legal money.

(2) Optional Money : Optional Money refers to that money which is commonly accepted by the public on the basis of faith but no body can be bound to accept it legally. Cheques, bills of exchange, Hundi are common examples of optional money. No one can be bound or forced to accept it in place of payments.

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Money can be classified into two types on the bases of money commodity :

(1) Metallic Money: A currency which is made up of metal is called metallic money. In ancient time the metals or commodities which were used as money for payment or for exchange were not similar to each other. But as time passed people started using gold and silver as money for exchange. Since then the art of coinage along with a specific trade mark came into practice. The process of manufacturing and framing of coins is called coinage and the manufacturing unit or factory where coinage is built is called mint. During coinage, coins of specific value are produced of equal shape and size and can be easily recognized.


Coinage is basically of two types:

(1) Free or Unlimited coinage: In this system of coinage, people are free to go to mint and exchange their metals with coins or coinage their metals. This system prevailed in India till 1893 and in England till 1931. But with the extension or emergence of full-bodied coins this system came to an end.

Free or unlimited coinage is further subdivided into three types:

(a) Gratuitous coinage : If the government does not charge any expense or commission from the people for unlimited coinage then it is called gratuitous coinage.

(b) Non-gratuitous Coinage or Brassage : When government charges expanse or commission from public for the coinage then it is called non-gratuitous coinage or brassage.

(c) Seigniosage : When the government charges more that the actual amount of brassage as the expense for coinage then the extra money becomes a 17 profit for the goverment. That is why it is called seigniosage. It is the difference between the actual expense and the expense charged.

(2) Limited Coinage : Under this system the public is not allowed to brassaging the metal in the mint. The government reserves all the rights for the brassage of coins. The quantity of coins to be produced is also decided by the government. The government purchases the metal from market and then it makes arrangement for coining the metal. Nowadays limited coinage system is prevailing through out the world. In India coinage is limited since 1893 after the recommedation of Herschel committee.

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Metallic money is divided into two types:

(1) Standard or Full-bodied Coins : Standard or full-bodied coins are paradigm as prominent coins. These coins circulate in the country as an actual money as well as money of account. Their face value, marked value and internal value are almost equal. These coins may be made of either same metal or different metals. When coins made of one metal are in circulation, they are called monometallic while coins made of two metals are called bimetallic coins.

Merits of Standard Coins

(a) Since the face value and marked value of standard coins of full-bodied coin is equal, so people have trust on it.

(b) Since these coins are full-bodied coins so can easily be preserved for using them in future.

(c) It can also be used for making foreign payments.

(d) Since the amount of coins in any country is not limited so there is no change or fear of inflation.

Demerits of Standard Coins

The following are the demerits of standard coins or full-bodied coins.

(a) Standard of full-bodied coins are made of valuable metals. It depreciates after circulation for a long period. Depreciation of valuable metal is regarded as nation’s loss.

(b) Flexibility is not found in standard coins i.e. with an increase in the demand of standard coins the supply doesn’t increase in the same ratio. In other words the demand and the supply of standard coins may not be directly proportional to each other.

(c) Since standard coins are made of valuable metals so there are change of faradism.

(2) Token Coins : Token coins refer to those coins whose marked value is more their internal value. These coins are made of cheap metals like nickel, copper, brass etc. Their open coinage does not take place. Their marked value is fixed by the government. Token coins are also called ‘fiat money’.

Merits of Token Coins

The following are the merits of token coins :

(a) Due to the use of token coins, costly metals are saved.

(b) Token coins have the quality of flexibility.

(c) Small payments can be done by token coins.

Demerits of Token Coins

The following are the demerits of token coins :

(a) These lack public faith. 18 SBPD Publications Money and Financial System

(b) Since these are made of less valuable or cheap metals so they are produced on large scale.

(c) These can be circulated only within the boundary of the country.

(d) It is not suitable for the storage or preserve for purchasing power.


Indian rupee also changes from time to time.In 1835 a rupee of 180 grains was introduced in the market which consisted of 165 graus pure silver. As time passed quantity of silver too went on reducing in several phases. Till the year 1893 Indian money was made of silver and its face value and internal value was equal. But the present Indian rupees are neither made of silver nor are fullbodied coins. Apart from free or unlimited coinage Indian rupee is not done free. Therefore, it is the general view of economic experts that Indian rupee are token money. But this concept is not completely true. Today also, Indian rupee has a lot of qualities of standard coin. For example: It is the prime or standard currency of the country. It is unlimited legal tender money and measures the cost of goods or commodity. Thus we can say that Indian rupee is standard token money.

1 Paper Money: Paper money refers to that paper notes which are issued by the central bank or the government and promises to pay the written amount. According to Prof. Crowther, paper money passes through four stages :

(i) In the first stage, a certificate was being given to the depositors against their deposits. Depositor could get back the money after a gap of time by showing that certificate.

(ii) In the second stage, some of the reputed banks had got the right by the government to issue paper notes. Notes were issued by those banks only to their depositors.

(iii) In the third stage some banks had got the right to print money even more that what they had deposits.

(iv) The fourth stage is the present stage of note issue. In this stage only the central bank of the country has the right to issue note. In India notes are issued only by Reserve Bank of India.

Classification Financial Money Study


There are four kinds of paper money :

(1) Representative Paper Money : When gold or silver of equal value of paper money is kept in Reserve Fund at the time of issue of paper money than it is called representative paper money. In the year 1925 Hilton Young commission had recommended this type of paper money for India.

The Merits of Representative Paper Money

The following are the merits of Representative Paper Money :

(i) The chances of inflation in Representative Paper Money are almost negeigible.

(ii) Valuable metals are saved from being used.

(ii) Since these are issued against Reserve Fund, so public trust on it.

Demerits of Representative Paper Money

Following are the demerits of representative paper money :

(i) Under this system valuable metals are kept as dead stock.

(ii) This system lacks flexibility.

(iii) This system is not suitable for poor or under developed countries.

II Convertible Paper Money : When paper money is introduced in a country under such criteria that the public is free to convert this paper money into standard coin at any time, then it is called convertible paper money. Gold or silver is kept as Reserve Fund against the paper money. But 100 percent fund of gold and silver is not necessary for issuing this type of paper money. The government promises the public that they can demand gold or silver in exchange of their notes.

Merits of Convertible Paper Money

(i) Valuable metals are saved from being used due to this prevailing system.

(ii) Public has full faith on it.

(iii) This system is flexible.

(iv) Foreign payments become easy through this system.

Demerits of Convertible Paper Money

The following are certain demerits of convertible paper money :

(i) This system lacks public faith.

(ii) There is a fear of inflation in it.

III. Inconvertible Paper Money : Inconvertible paper money is basically that money which government does not make any promise to exchange them with standard coins or any valuable metal. Generally government securities, bonds, Treasury bill and foreign exchanges are kept as Reserve Fund against this paper money.

Merits of Inconvertible Paper Money

The following are the merits of inconvertible paper money :

(i) This system is practical.

(ii) This system is flexibe.

(iii) It is economy because minimum metallic fund is kept in Reserve Fund.

Demerits of Inconvertible Paper Money

This system has certain demerits which are as follows:

(i) There is always a fear of inflation.

(ii) This system lacks public faith.

IV. Fiat Money : Fiat money is a form of inconvertible paper money. It is issued generally in emergency without any Reserve Fund. So, it is also called emergency money. This money is issued in limited quantity.


The following are the important qualities of paper money which make it more popular.

(1) Economical : Paper is required instead of metal for manufacturing paper money. So the manufacturing expense is very less. There is neither fear of depreciation nor coinage expenses are required.

(2) Portability : Since it is light in weight, so paper money having any value is easy for transportation.

(3) Elasticity in Money Supply: According to the need and demand the quantity or amount of paper money can be changed, but in case of metallic money it is not possible because metal in a country is always in a limited quantity.

(4) Assistant in Emergency: In case of emergency when the government needs additional money and the amount of gold and silver is not available in sufficient quantity then the government circulates paper money.


The following are the important disadvantages of paper money :

(1) Danger of Inflation : The biggest disadvantages of paper money is that there is always a fear of inflation. Whenever the government faces economic problems, in order to solve them additional paper money is introduced.

(2) Lack of Internal value: From the public point of view paper money is nothing but a faith on the government. Its internal value is zero and it is trust worthy only when people have faith on the government.

(3) Perishable: Paper money is not durable. There are maximum chances that it gets worn, torn and if they perish badly than a lot of problems can be created during their exchange.

(4) Speculation : Since the value of paper money is not stable and fluctuation in its value takes place on international bases, therefore it encourages speculation.


New Money refers to that money which is actually not money but posses a lot of its qualities. They can be converted into money i.e. liquidity is found. Bills of exchange, bonds, shares etc. are examples of near money. Income as interest and dividend can be obtained by near money.


The following are the important qualities of good money material :

(1) General Acceptability : The metals which are selected for coinage should have general acceptability of public. Even if it is disapproved by a single group of people. it is considered a bad money material. From this point of view gold and silver are considered as best money materials.

(2) Cognoscibility : That metal chosen for coinage should have the cognizance of public. Accordingly gold and silver are considered an ideal material.

(3) Indestructibility : Indestructibility is an important quality of money material. Money material should possses a durable quality. In other words, it must be available and should not rot, thaw or rust.

(4) Portability : Due to various reasons money is transferred to many places. Therefore the material chosen for money should have the quality of portability. In this context paper money possesses maximum portability and it comes after gold and silver.

(5) Divisibility: Money material should have the quality of divisibility so that in adverse situation it can be fragmented into small units. Gold and silver are its best examples.

(6) Malleability : Money material should neither be too hard nor too som It should be such that it can be easily melted and brassaged into any shapes au size and some specific value can be marked on it.

(7) Homogeneity: Metals to be used for coinage should be such money a specific value which appear similar to each other.

(8) Stability in value: The money material in use should have stability its value i.e. its value should not fluctuate.

Keeping in mind all the above mentioned facts we come to the conclusion that there is no such metal which has all favorable qualities other than gold and silver. So gold and silver can be said as good money material.

Classification Financial Money Study


Long Answer Type Questions

1 Explain the various types of money prevalent in India.

2. What do you mean by Paper Money ? Explain its advantages and disadvantages.

3. Explain the qualities of a good money material.

Short Answer Type Questions

1. Is Indian Rupee a token money?

2. What is near money?

3. What do you mean by money of account?

4. Write notes on gratuitous coinage.

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III. Objective Type Questions

Choose the correct option

1 Money in which books of accounts are kept in a country is called :

(a) Money of account

(b) Representative money

(c) Standard money

(d) Metallic money

2. Which money is also called emergency money?

(a) Fiat money

(b) Convertible paper money

(c) Inconvertible paper money

(d) Representative paper money

3. Indian rupee is :

(a) Token money

(b) Standard money

(c) Standard-token money

(d) None of the above

4. According to Prof. Crowther, the stages of paper money are:

(a) 2

(b) 4

(C) 5

(d) 6

5. Which one is near money?

(a) Rupee

(b) Metallic money

(c) Bonds

(d) All of the above

6. How many types of legal tender money are there?

(a) 2

(b) 3

(c) 4

(d) 5

7. Who had classified money on the bases of nature ?

(a) Prof. Crowther

(b) Prof. Seligman (c) Prof. Marshall

(d) Prof. Keynes

[Ans.: 1. (a), 2. (a), 3. (c), 4. (b), 5. (c), 6. (a), 7. (d).]

Classification Financial Money Study

IV. State whether the following statements are True or False :

When internal value and marked value of commodity money is equal, it is called full-bodied money.

2. Paper money is a suitable example of representative money.

3. Cheque is not an optional money.

4. Representative money has no internal value of its own.

5. The process of manufacturing of coins is called mint.

6. Money which comes into circulation in any country through the medium of exchange is called actual money.

7. Commodity money is one of the kinds of actual money.

[Ans. : 1. True, 2. True, 3. False, 4. True, 5. False, 6. True, 7. True.]

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