Money & Types of Money

Money is the most commonly accepted form of exchange for goods and services. It can be anything as long as it satisfies three conditions:

• Medium of exchange
• Store of value
• Unit of account

Currency refers to the aggregate of coins and paper notes (paper money). 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.

Commodity Money is a type of money that has value in and of itself, such as gold, silver, or other precious metals.

Fiat Money is a type of money that is not backed by any physical commodity, but is instead declared by the government to be legal tender.

Fiduciary Money is a type of money that is backed by the credit of the issuing institution, such as a bank or government.

The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

The BRBNMPL is a wholly-owned subsidiary of the Reserve Bank of India (RBI). It was established in 1995 to print banknotes for the RBI. The BRBNMPL is responsible for printing all of the banknotes that are currently in circulation in India.

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Money & Types – Meaning & Overview

Currency, in a broad sense, is the tangible medium of exchange. There are approximately 180 currencies in the world, according to the United Nations. However, the British pound is the oldest currency still in use, dating back to the 8th century.

The various types of money include:

• Commodity Money
• Fiat Money
• Fiduciary Money

Money & Types (Terminologies)

Commodity Money

• Commodity money is the oldest form of money, using scarce natural resources as a medium of exchange, store of value, and unit of account.
• It simplifies the barter system by acting as a commonly accepted medium of exchange.
• The value of commodity money is determined by the actual value of the commodity itself.
• Examples include gold coins, shells, spices, and beads.

Fiat Money

• Fiat money is paper money with a face value greater than its intrinsic value.
• Its value is determined by government decree and is not redeemable for a standard commodity.
• Fiat money serves as a medium of exchange and a standard of value.
• The face value of fiat money is not equal to its real value.
• It is widely used around the world.

Fiduciary Money

• Fiduciary money derives its value from the trust and confidence that it will be accepted as a means of exchange.
• Unlike fiat money, it is not considered legal tender by the government.
• The issuer of fiduciary money guarantees to exchange it for a commodity or fiat money upon request by the bearer.
• As long as there is confidence in the assurance, fiduciary money can be used like regular fiat or commodity money.
• Examples include banknotes, drafts, and checks.

Read more about Development banks in India here.

Commercial Bank Money

• Commercial bank money is a claim against a financial institution that can be used to purchase goods and services.
• It is created through fractional reserve banking, where banks lend out more money than they have on hand.

Metallic Money

• Metallic money is made of metals like gold, silver, bronze, and copper.
• Its value is equivalent to its actual or intrinsic value.
• Metallic money can be categorized into full-bodied coins and token coins.

Paper Money

• Paper money refers to banknotes and government notes used as money.
• It was introduced to replace metallic money.
• In modern times, paper notes have become token money, accepted without reference to a metallic equivalent.

Representative Money

• Representative money is token coins and paper notes that can be readily converted into full-bodied coins or equivalent bullion at a fixed rate.
• In India, rupee notes and coins were representative money until 1927 when they could be easily converted into gold.

Unlimited Legal Tender

• Unlimited legal tender is money declared by the central government to be legal tender to an unlimited extent.
• Creditors must accept payments in this money without limit.
• Rupee notes and coins are unlimited legal tender in India.

Limited Legal Tender

• Limited legal tender is coins and notes that are legal tender only to a limited extent.
• All small coins in India are legal tender up to one rupee.

Optional Money

• Optional money includes instruments and notes like bills of exchange, promissory notes, and checks that are often accepted in the discharge of liabilities and obligations, even though they are not legal tender.
• These instruments are collectively known as “Optional Money” in collection.
• Their acceptability is based on the mutual consent of all parties involved in the transaction.

Bank Money

• Bank deposits that can be withdrawn through checks are generally known as bank money.
• Most banks create deposits when they extend loans to individuals or firms. These deposits are also known as bank money.
• All the banknotes issued by the banks contribute to another part of the bank money.

Credit Money

• Most of the loans extended by the banks to individuals and/or businesses are usually held by them in the form of bank deposits.
• Such deposits can be withdrawn by using instruments like checks, just like primary deposits made by depositors. It is called credit money.

Money & Types in terms of Supply (M1, M2, and M3…)

M0 and M1, also referred to as narrow money, include coins and notes in circulation and other equivalent money that are easily convertible into liquid cash.

M2 encapsulates M1 in addition to short-term time deposits in the banks and 24-hour money market funds.

Reserve Money (M0)

Circulating Currency + Bankers’ savings in the accounts of the RBI + Other deposits with the RBI = Net RBI loans given to the government + RBI credit to the commercial sector + RBI’s debits on banks + RBI’s net in foreign assets + government’s currency debts to the public – RBI’s net non-monetary liabilities

M1:

Currency held by the public + Banking system’s demand deposits + Other deposits with the RBI

M2:

M1 + Savings deposits with banks + Time deposits with banks of up to one year
M2 is a broader classification of money compared to M1. It includes highly liquid assets, excluding cash.

Formula: M2 = M1 + Savings banks’ deposits in savings accounts

M3:

M3 is a measure of the money supply that includes M2 plus institutional money market funds, large time deposits, short-term repurchase agreements, and other larger liquid assets.

Formula: M3 = M1 + Time deposits in the banking sector = net bank credit to the central/state government + Bank credit to the commercial sector + net foreign holdings of the banking system + government’s currency debts to the public – net monetary debts of the banking sector

M4:

M4 is the sum of M3 and all deposits with post office savings banks (excluding National Savings Certificates).

Formula: M4 = M3 + Entire deposits with post office savings banks (excluding National Savings Certificates)

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

• The Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) was established by the Reserve Bank of India (RBI) as its wholly owned subsidiary in February 1995.
• It operates as a private limited company under the Companies Act 1956.
• The BRBNMPL’s primary objective is to augment the production of banknotes in India, assisting the RBI in bridging the gap between demand and supply of banknotes.
• It is headquartered in Bengaluru, Karnataka.
• The BRBNMPL owns and operates two presses, one in Mysore and the other in Salboni.
• The RBI has two additional printing presses in Nasik (Maharashtra) and Dewas (Madhya Pradesh).
• Coins are minted in four mints entirely owned by the Government of India, located in Bombay, Hyderabad, Calcutta, and Noida.

Additional Information

• BRBNMPL (Bharatiya Reserve Bank Note Mudran Private Ltd.): This company is responsible for augmenting the printing of currency notes and coins in India, in collaboration with the Reserve Bank of India.

• BRBNMPL Headquarters: The headquarters of BRBNMPL is located in Bengaluru, Karnataka.

FAQs

1. What is money?

• Money is the most commonly accepted form of exchange for goods and services.

2. Who issues currency notes and coins in India?

• The Reserve Bank of India holds the right to issue currency notes and coins in India.

3. What are the types of money?

• Various types of money include commodity money, fiat money, metallic money, paper money, reserve money, fiduciary money, and commercial bank money.

4. What is BRBNMPL?

• BRBNMPL stands for Bharatiya Reserve Bank Note Mudran Private Ltd. It is responsible for augmenting the printing of currency notes and coins in India, along with the Reserve Bank of India.

5. Where is the BRBNMPL headquartered?

• BRBNMPL is headquartered in Bengaluru, Karnataka.

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