Kinds of Money

 Money has had several incarnations. In Bangladesh, money consists of coins, paper currency, and deposit money. Coins are not full-bodied, but only token money, because the intrinsic (metallic) value of token coins is less than their face value.

 Currency notes are merely pieces of paper that have no intrinsic value of their own. They are not convertible into anything of value at a fixed rate. The issuing authority does not stand ready to buy them back against gold or silver or full-bodied gold or silver coins of equal value at a pre-determined prices. Thus, all paper currency is inconvertible. The legend carried on the face of a currency note of (say) ten taka that ‗I promise to pay the bearer the sum of ten taka‘ (signed by the Governor, BB) is a carry-over from the past when currency notes were convertible into full-bodied silver rupees. Now it simply means that note can be converted into other notes or token coins of equal value.           

Deposit money is not like coins or currency notes that can be passed on from hand to hand for a transfer of purchasing power. Deposits are only entries in the ledgers ofbanks to the credit of their holders. We are treating only demand deposits of banks on which cheques can be drawn as money. The chequesare an instrument through which these deposits can be transferred from the payer to the payee. Only when the ownership of these deposits has been so transferred is the medium-of-exchange or the means-or payment function of these deposits completed. The transfer is completed by debiting the amount of the cheque to the account of the drawer of the cheque andcrediting it to the account of the drawee. This transfer is a simple affair if both the drawer and the drawee of the cheque are account holders in the same bank (branch). It involves the use of a specially-organized clearing arrangement, when the drawer and the drawee belong to two different banks.

 

A clearing-house is an association of banks operating in a particular locality. It serves as a meeting place for the representatives of member banks at appointed hours on each working day to settle payments of cheques and other transfer orders on each other by their customers. This is done by cancellation of equal amounts of credits and debits of each bank against every other bank, taken singly and settling the balance by drawing a cheque of the appropriate amount on its account with the clearing house or the BB in favor of the surplus bank. In the case of out-of-town cheques on other banks, a similar process works. The local branch of the drawee's bank takes over from its counterpart in another place. For an out-of-town cheque on another branch of the same bank, collection of the amount of a cheque is effected through a process of internal clearing.

 

The clearing-house facility is of great importance for the successful working of any banking system and of the use of bank money as a medium of exchange. Clearing arrangements economize greatly the use of cash. Bank clearings facilitate transfers of funds quickly, safely, and at low cost. The advantages accrue to the users of cheques. They encourage the use of bank money in place of currency. For businesses specially, quick clearings are very important as they affect the day-to-day cash-flow or liquidity positions of the cheque-using firms.

 

The clearing arrangement of banks is central to the working of any payments system that uses deposit (bank) money. Checking deposits serve as means of payment only when they are transferred from one depositor to another.

 

All the three components of present-day money have one feature in common. All of them are fiduciary (credit) money: money that circulates as money on the basis of the trust commanded by its issuers. This illustrates very well the truth of the statement that money is what the public believes to be money.' The essential property of moneyis that it should be generally acceptable as means of payment. The use of fiduciary money is highly economical: it releases precious metal embodied in coins under full- bodied metallic standards for non-monetary uses. All metallic standards were wasteful.

 

Another useful distinction is between (a) legal tender or fiat money and (b) non-legal tender or credit money proper. Coins and currency notes are fiat money. They serve as money on the fiat (order) of the government. Being legal tender means that,under the law of the land, the money in question must be accepted or cannot be refused in settlement of payments of all kinds. This is not true of demand deposits of banks, which are fiduciary money proper, as they are accepted as money on trust.  They are not legal tender. Apayee can legally refuse to accept payment in demand deposits (made through a cheque), and insist on payment in cash. This is because there is no guarantee that a cheque will be honored at the issuer's bank.

Legal tender money may be limited or unlimited legal tender. Small coins are usually limited legal tender. That is, they are legal tender for payments upto only a certain maximum amount. Beyond this amount, for a single payment, they cease to be legal tender. Usually currency rates are unlimited legal tender.