An incredible diversity of items have served as money at various times and in various places. However all of these moneys can be classified as either:
a) Commodity money
b) Flat money
The simplest differentiation between these types of money is that commodity money has substantial value a part from what it will buy while flat money is important only because of its uses as money (legal tender). Ultimately the use of flat money is driven by faith and acceptability of the item being used. Flat money also depends on stability of the government that issues it. One can further classify money into 3 major categories.
a) Real money – full bodied money
b) Token money
c) Representative money
1. Real money Comprises of items that have intrinsic value. This includes gold and other precious metals and stones. Even today?s modern world settlement of indebtedness between countries is frequently done in gold. Full bodied money or real money tends to have its monetary value equal to its component stuff. Its value as a coin is the same as its value as a metal. Full bodied money is either metallic or represents money
2. Token money is an item which is accepted for value in excess of its real / intrinsic value. This implies that its base is higher that its market value. It?s made up of cheap material and its official purchasing power is higher than the value of its metallic contents. Due to relatively scarce supply of gold and difficult in dividing into very small units, other coins of inferior value emerged. Gradually the metal content value of these coins reduced far below their printed face value e.g. the metal content of a 5 shilling coin is much less than 5 shilling. These coins however remains acceptable by the general public because laws have been enacted making it legally binding for people to accept it for face value. Token money is said to be a real tender – value of a token money is at the discretion of currency authority that issues it.
3. Representative or optional money Besides currently notes and coins there are other forms of paper performing the function of money e.g. cheques, bill of exchange, bank draft, travelers cheques or IOU documents. These instruments however, not being legal tender can be refused. They in fact represent money lying elsewhere e.g. cheques represent bank deposit.
Wilfykil answered the question on March 8, 2019 at 07:40