What we are going to Learn in Today’s Lecture…

What are Forms of Money?

What are Principles of Note Issue?

What are Methods of Note Issue?

Difference between money & near money.

Forms of Money

MetallicMoney

Paper Money

Bank Money

CommodityMoney

PlasticMoney

1: Commodity Money

Commodity Money

Commodity money can be thought of as the earliest form of the money. In ancient times money was in the form of different goods that were commonly used by people in everyday life. However, the problem was that different societies were using different things as money. So there was no standardized unit of account or measure of value.

Commodity Money ClayClay Cowry ShellsCowry Shells Tortoise Tortoise

ShellsShells

Whale TeethWhale Teeth Cattle'sCattle's HorsesHorses

CigarettesCigarettes SaltSalt CornsCorns

PotsPots BoatsBoats StonesStones

Iron Iron WoolWool SlavesSlaves

2: Metallic Money

Metallic Money

• Metallic money consists of coins, made of gold, silver, copper or nickel.

• Metallic currency varies in weight, fineness and in value.

• People started using these metals as money because they were scarce.

• Metallic money are of small denomination.

• Advantages• easily kept• Converted into other type of currency• No chance of melting

• Disadvantages• Limited legal tender money

Kinds OF Metallic Money

Full bodied Money

TokenMoney

Kinds OF Metallic Money

• Full Bodied Moneywhose face value is equal to the intrinsic value.

• Token MoneyIt face value or printed value is higher than the value of metal Contain in it. Now a day’s all coins in Pakistan are the examples of token money.

Resource Person : Muhammad Rafiq

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Leather Money

Leather Money

• Banknotes in the form of leather money were used in China

• One-foot square pieces of white deerskin edged in vivid colors were exchanged for goods

• This is believed to be the beginning of a kind of paper money

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3: Paper Money

Paper Money

• The term paper money refers to the notes issued by the state or by a bank, usually the Central Bank. The origin of this from of money can be traced back to the receipts issued by the goldsmiths.

Kinds OF Paper Money

FiatPaper Money

RepresentativePaper Money

Worked till 1914

ConvertiblePaper Money

Kinds OF Paper Money• Representatives paper money

Representative paper money is on which is fully backed by gold or metallic reserves. This means that govt. is in a position to convert all the notes into gold.

• Convertible paper moneyConvertible paper money is such a form of money which

can be converted into gold & metallic reserves but not all the notes issued by the govt. are fully backed by the gold.

• Fiat paper moneyFiat paper money is that we have got in our pocket.

Neither it is convertible, nor it is fully backed by gold or metallic reserves.

4: Bank Money

Bank Money• Bank money means near money which is not

always legal tender money. But it is widely accepted as a medium of exchange. Bank money mostly consist of • Cheques • Drafts • Bill of exchange.

Kinds OF Bank Money

ChequesBills of

ExchangeDrafts

ChequeCheque

Bill of ExchangeBill of Exchange

DraftDraft

Kinds OF Bank Money• Cheques

• Cheques is a written instruction on a specified piece of paper from a client to his bank instructing the later to pay a certain sum of money.

There are three kinds of Cheques• Bearer Cheques• Crossed Cheques• Order Cheques

• Bill Of Exchange• It is a convenient way to pay for commercial transaction in credit. The

seller instead of taking cash from the buyer draws a bill on him which the buyer accepted by signing it. This bill can be a sight bill or time bill.

• Draft• Draft is just like a Cheques however the difference is that it is drawn by

the bank on its own branch or on any other banks branch.

5: Plastic Money

Plastic Money

Plastic money means the credit cards and plastic cards which have silicon chips and a specially printed set of characters. These cards are used for making payments at ordinary shops and at ATM (Automated teller machine).

Overview of note issue principles

At the time of Bank Chartered Act in England 1844 there was a huge controversy over the matter as to what is the most suitable method & principle of issuing notes. Some economists favor the currency principle and other advocated for banking principle. Both these principles are discussed in next coming slides.

Types of note Types of note issue principlesissue principles

Banking Principle

Currency Principle

Currency Principle

The currency principle is based on 100% gold backing. According to this principle state or central bank must keep 100% reserves against each and every note issued.

Merits of Currency Principle

Full Safety

No Over Issue

Stability

confidence

De Merits of Currency Principle

Inelastic

No Use of Gold

Not suitable for modern economy

Banking Principle

banking principle lies on the other hand. This principles says that note issuance should be dealt independently by central bank and it shall be allowed to issue notes according to the ongoing circumstances also there is no need of full backing of gold under this principle.

Merits of Banking Principle

Elastic Supply

Economical

Usage of Gold reserves

Merits of Banking Principle

Suitable for modern economy

Helpful in emergency

De Merits of Banking Principle

Danger of over issue

Lack of convertibility

Methods of Note Issue

Fixed Fiduciary

System

Proportional ReserveSystem

Exchange Management

Fixed Fiduciary System

this is widely recognized as an important method of note issue. Under this system a limit of volume of currency has been fixed by central authority. This limit is called fiduciary limit. Any note issue in this fiduciary in to be backed by govt. securities. However any note issued above this limit are to be 100% backed by gold.

Merits of Fixed Fiduciary System

Controlled SupplyControlled Supply

No Danger of Over IssueNo Danger of Over Issue

Proportional Reserve System

under this system the central bank is required to keep 100% reserve for a particularly percentage of notes issued. The rest of the notes issued are backed by govt. securities and govt. bills. Usually 25% to 40% of notes issued are fully backed gold and rest are backed by govt. securities.

Merits of Proportional Reserve System

A widely prevailed System

Elastic

Responsive

De Merits of Proportional Reserve System

Lockup of Gold

Unstable

Rigid

Exchange ManagementJ.M Keynes has suggested a modified form of proportional reserve system called “ Exchange Management”. According to this system, the Central Bank is required by law to keep the percentage required, against the note issue in the form of gold and silver, Foreign bills etc at some foreign bank, Where gold standard prevails. This method is adopted by Pakistan, India and many other countries, Because it is very much elastic.

System Prevailing In Pakistan

Pakistan has adopted “Proportional Reserve System” with “Exchange Management”. The State Bank of Pakistan is authorized to issue currency notes after keeping 30% reserves in shape of gold and approved foreign exchange at central Bank.

Merits of Exchange Management

Elastic System

Helpful in Crisis

Saving precious metals

Useful for developing countries

NEAR MONEY

• Near money is not perfect money but something adjacent to it. It contain characteristics of perfect money & can be converted into money very easily.

Examples Of Near Money• Demand Deposits (cheques, Drafts)• Bonds• Govt Securities• Debentures• Bills Of Exchange• Insurance Policies

Difference between money & near money

• Interest earning• Liquidity• Legal tender• Standard unit

Importance of near money

• Spending & consumption• Inflationary trends• Economic policy• Liquidity preference• Difficulty to copy• Uniformity• Growth & development• International trade