the 4 forms of money

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The forms of money have varied greatly throughout history. The transition from an economy dominated by barter to a monetary economy was accompanied by a major change in the forms of money.

In this respect, we can distinguish between different instruments of circulation that have succeeded one another and shaped the dominant era:

  • Physical money.
  • Fiduciary money.
  • Scriptural money.
  • Electronic money.

What is Money?

Definition and Importance

Money can be defined as any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. It plays a crucial role in the functioning of economies by facilitating trade and economic activity.

Understanding the Four Forms of Money

Physical money

Materialised money is defined as an asset that breaks with barter and is actually involved in exchanges. Historically, it was commodity money that came into play first, then metallic money.

Commodity money

Originally, certain goods were used as money for transactions, particularly consumer goods (wheat, barley, cattle, etc.). These goods were chosen because they possessed certain fundamental qualities: they were known, accepted by the community as having a certain use value and were trusted by everyone.

Without being limited to this category, these goods were substituted for other goods that were more highly valued and more distinctive. These were metals. Initially, non-precious metals were used (iron, copper, bronze), followed by precious metals (silver, gold).

In general, metal money was superior to commodity money. A plausible explanation for this lies in the subjective value revealed by this form, which relates to its rarity and the possibility of keeping it. This subjective value is complemented by the objective value of this currency, which is distinguished by its homogeneity and divisibility.

Metallic money

This form has evolved over time. Metallic money was successively weighed, counted and minted.

At first, coins were weighed. This was to ensure that the creditor was given the weight of metal needed to settle the debt and also to ensure that there was no fraud. It was the ingot that was weighed.

Given the slowness and archaic nature of this process, it was not easy to make this weighing compulsory. It was therefore necessary to break down the ingot into coins and, consequently, to replace weighed money with counted money.

At the time, the disadvantage of this substitution was fraud. This took the form of introducing non-precious materials into the production of coins or melting down the ingot again and producing coins of a lower weight.

To combat this phenomenon, the State intervened, and coinage was its responsibility. Its intervention consisted of putting an end to this currency manipulation and guaranteeing the weight and quality of the coins. From then on, money became a public good whose intrinsic value was equal to its face value.

Since the stock of metal coins could not meet the ever-increasing demand, it was important to manufacture more coins with the same quantity of metal. This meant that only coins with an intrinsic value lower than their face value were produced.

In order to gain public acceptance for these new mints, the monetary authorities gave the coins legal tender status and the power to release them from circulation: in other words, they could not be refused in transactions. Hence “metallic money” was replaced by “divisional money”.

Fiduciary money

Fiduciary money is a form based on the principle of trust. The name of this currency has its origins in history.

At the time, banknotes were simply certificates of deposit. Bankers received deposits of precious metal from their customers and in return gave them certificates of deposit (receipts), worth the same amount as the metal deposited. These certificates of deposit circulated from hand to hand and were redeemable at any time.

Goldsmiths soon realised that they could lend gold or create more receipts in order to grant credit to their customers. As a result, goldsmiths became true bankers, and the banknote was born. The value of the banknote was based on the trust placed in the issuing institution.

The Stockholm Bank was created in 1956. This bank issued more notes than it actually had gold reserves. Only part was guaranteed by the stock of metal, the other part was not. It was guaranteed by debt securities on customers seeking credit, but the value of these notes was based on trust.

Overall, the note has legal tender and forced tender status. For legal tender, the creditor is obliged to accept the note in payment of his debt. Forced legal tender refers to the banknote’s non-convertibility into gold.

Scriptural money

Uncertificated money has special characteristics that distinguish it from all other forms. The first developments in this type of money were the bills of exchange.

This form of money quickly took off in England, when commercial banks lost the ability to issue banknotes. This task was entrusted to the Bank of England.

Since then, commercial banks have begun to provide means of payment by creating scriptural money.

The name of this currency comes from the Latin word “scriptura”, meaning writing. Scriptural money is defined as simple entries made by banks in the accounts of economic agents.

Scriptural money is the main form of money. There are practical reasons for its triumph: security, convenience and safety. Security means less risk of loss or theft. Convenience means that a sum of money can be mobilised simply by writing it down, and payments can be made without having to travel. Security, on the other hand, implies traceability of the system, in other words, a written document that can be used as proof.

Scriptural money is made up of deposits made by economic agents in banks. It circulates between agents using payment instruments that give the order to make entries in bank accounts. These instruments include cheques, transfers and bank cards.

Cheques

A cheque is a written document in which the holder of a bank account asks his bank to pay the amount written on the paper to the beneficiary. The paper must show the amount to be paid in words and figures, the order (i.e. the name of the payee) and the signature of the issuer.

When a debtor issues a cheque without naming the payee, the cheque is called a bearer cheque. If a cheque is lost or stolen, you can stop payment. This reverses the bank’s order to stop payment.

Transfer

A transfer is an order given by an account holder to his bank to transfer a specified amount to the account of a beneficiary. Transfers can be made internally when the accounts are held at the same bank, or externally when the accounts are held at two different banks.

Bank cards

A bankcard enables the cardholder to pay for a purchase at a retailer. The card debits the cardholder’s account and credits the merchant’s account. This card can also be used to withdraw cash from cash dispensers.

Direct debit notice

This enables a debtor who has given his bank a standing direct debit authorisation to pay his creditor, the issuer of the direct debit notice, without having to renew the order for each transaction.

The direct debit notice is initiated by the creditor, who debits funds under an authorisation given by the account holder.

This payment instrument is used, for example, to pay telephone bills.

Electronic money

This is the use of computer, magnetic and telematic techniques. These techniques highlight the dematerialised nature of money. Electronic money is immaterial.

It is materialised through the use of electronic purses (payment cards) and the Internet, in which case it is referred to as virtual money, such as online payments.

Conclusion

There are also other less common forms of money, such as travellers’ cheques, gift cards and vouchers, but these are generally considered to be alternative forms of money rather than currency in their own right.

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