Chapter No 2

Forms Of
Money
 Chp
overview
• Forms of money
• Coinage of money
• Paper money
• Merits and demerits of paper
money
• Methods of note issue
 Forms of
money
• On the basis of its course of evolution
,money is classified as:
• Metallic money
• Paper money
• Bank money
 Metallic
money
• It consist of coins, made of silver ,gold,
copper, Nickle
• It varies in weight, fineness and in value
• Metallic money is of three kinds:
I. Full bodied money
ii. Token money
iii. Tender money
Tender money
Any currency which is generally acceptable in discharge
of debts is called tender money it can be made of
paper or metal. If someone offers tender money against
debts, nobody can refuse to take it. Tender money has
two types
a. Limited tender money
b. Unlimited tender money
Limited tender money:
Coins of small values are called limited tender
money. Such as coins of Paisas.1, 20 and 50 paisas.
Unlimited tender money:
Coins of large values are called unlimited tender
money. Notes of Rs 10, 50, 100, 500, 1000, 5000 are
called unlimited tender money.
 3. Paper
money
Paper money consists of notes issued by the
state bank of Pakistan. The paper money is of
different values, colors and sizes. Paper money
is more convenient than any other form of
currency.
Types:
• Representative paper money
• Convertible paper money
• Fait paper money
 a.Representative paper
• It ismoney
fully backed by equivalent
metallic reserves.
• The holder of the bank note can easily get it
converted into the metallic money on demand.
•  In the ancient empires of Egypt, Babylon, India
and China, the temples and palaces often had
commodity warehouses which issued certificates
of deposit as evidence of a claim upon a portion
of the goods stored in the warehouses, a form of
"representative money".
 b. convertible paper
money
• It is convertible into coins on demand
called convertible paper money.
• State which issues it does not keep an
equal value of metallic reserves behind it.
 c. Fait paper
money
• It is not convertible into gold and silver
on demand.
• It is accepted as it has been declared
legal tender by the issuing authority .
• It accepted as a medium of exchange.
 Bank
Bank money alsomoney
called credit money includes
cheque, bills of exchange, and drafts. Bank
money is playing a vital role in the economic
development. Because varies transactions are
settled without the use of paper money.
Bank money is safer than any other form of
money.it mostly consist on:
1.Cheques
2.Bill of exchange
3.Draft
 Cheques

Cheques is merely an order on a bank by its

client to pay a sum of money to himself or to a
third party on demand .
Kinds of cheques:
• Bearer cheque:
It can be cashed from a bank by any person
who presents it at the counter.
• Order cheque:
It is more safe form of cheque as compared to
bearer cheque. It cannot be enchased unless it
is determined by the bank that it is paid to the
right person
1 .Payee:
a person to whom money is paid or
due. 2. Drawee:
a person or bank that is ordered by its
depositor, a drawer, to withdraw money from
an account to pay a designated sum to a
person according to the terms of a check or a
draft.
3.Drawer:
one that draws an order for the payment
of money.
• Crossed cheques:
Two parallel line are drawn across the face of
cheque and the words “payee account only “
are written between them, it becomes a
crossed cheque. The format and wording varies
between countries, but generally two parallel
lines may be placed either vertically across the
cheque or in the top left hand corner. By using
crossed cheques, cheque writers can effectively
protect the cheques they write from
being stolen
being stolen or cashed. and
 b. Bill of
exchange
Bills of exchange is an instrument in writing
which contains order of payment by creditor to
debtor. A bill of exchange is a non-interest-
bearing written order used mainly in
international trade that binds one party to pay
a fixed sum of money to another party at a
predetermined future date. In case of bill of
exchange there are three parties, drawer
drawee and payee. Period for making payment
of bills of exchange is written on it.
 c.
Draft
• Draft is a cheque drawn by a bank on its own
branch or on the branch of its own bank at a
different place requesting it to pay on
demand a specified amount to the person
named in it.
• J.M. Keynes has discussed two other types
of money in his book A TREATIE ON
MONEY
• Commodity money
• Managed money
• Commodity money:
The use of a specific commodity as a form of
money. Commodities such as gold and silver have
been used for years as a method of payment. Oil
has also become a precious resource that is used
in this form.

• Managed Money :
It is an investment method where the investor
places his or her money in the hands of a qualified
investment professional for a predetermined
annual fee. The investment manager researches
prospective investments, makes investment
decisions and maintains the portfolio.
 Coinage of
money
• The process of manufacturing metals into
certain shapes so that the equality in
weight and size is maintained in all the
coins of the same kind.
• Before the advent of coin the metals like
gold and silvers were used as a medium of
exchange. But there were difficulties in
weighting and testing all metallic currency
for each transactions.
History of Coinage in
Pakistan
 Paper
Money made up of paper is called paper money. It consists of the
money
notes issued by the central bank. In Pakistan notes of Rs 5 to 5000
are the examples of paper money
Advantages of paper money:
Following are the advantages of paper money
1. Economical
2. Easy handling
3. Easy counting
4. Emergency needs
5. Metal savings
6. Easy transfer
7. Easy payment
8. Uniform quality
9. High value in small bulk
10.Stability
11. Recognizable
12.Storability
13.Advantage for banks
1. Economical
Printing cost of paper money is less than the
minting charges of metallic money. Paper
money is cheaper than the metallic money. A
large quantity of paper money can be issued
at very low cost
2. Easy handling
Paper money has lesser weight than metallic
money. It is easy to handle paper money than
coins.
3. Easy counting
Paper money is easy to count than the
metallic money. The counting of coins in
larger sum in coins takes more time. Paper
money takes lesser time than the metallic
4. Emergency needs
Paper money is friend in peace and war. Central
bank can increase the supply of paper money
for meeting the economic needs.
5. Metal saving
Metal saving is possible when paper money is
used rather than metallic money. Metals like
gold and silver can be used for other
productive purpose.
6. Easy transfer
Transfer of paper money is easy and cheaper
than metallic money because it is light
weight and takes less space
7. Easy payment
Payments of larger sums are easy and cheaper than
the metallic money because paper money is easy to
count and easy to transfer.
8. Uniform quality
Paper money has a also a uniform quality and holder
of the paper money does not suffer lose because old
and new notes have the same value
9. High value in small bulk
Paper money contains high value in small quantity
as compared to the metallic money.
10. Stability
Paper money is more stable in value but the value
of coins do not remain stable due to wear and
tear. The value of coins changes with the passage
of time.
11. Recognizable
Paper money of every denomination is easily
recognizable because of its different size,
color
and design.
12. Storability
Paper money is easy to store because of more
value in light weight. It takes less space so that a
large sum can be stored in small space even in
pockets.
13. Advantage for banks
Banks have the great advantage of paper
money they can easily count paper money buy
Disadvantages of paper
money:
1. Inflation
2. Limited acceptability
3. Danger of cancellation
4. Short life
5. Instability of exchange rate
6. Less confidence
1. Inflation
Printing of paper money is easy. In time of
need government may over issue currency
notes. This over issue may cause inflation
which increases the prices of goods and
decreases the value of money.
2. Limited acceptability
Paper money has limited acceptability. It is
acceptable only in the domestic country
and in other countries of the world it is
not
acceptable.
3. Danger of cancellation
There is always a danger of cancellation. If government
canceled the paper money then holder of money just has
the worthless piece of paper.
4. Short life
Paper money is less durable than the metallic money. Paper
money can be easily destroyed by fire, water or heat. So life
of paper money is less than coins.
5. Instability of exchange rate
Exchange rate means the rate at which the domestic money
is exchanged with the foreign money. Value of paper money
depends upon the fluctuations. The instability of exchange
rate directly affects the foreign trade.
6. Less confidence
As value of paper money is less stable and it has no real
value in it. So people have less confidence in paper money.