The Different Types of Currencies
The Different Types of Currencies
Money is a very important aspect of our lives. Without money, you can’t buy groceries, fix your car, pay for school, take your children to school, take a vacation, etc. Money is used to facilitate our way of life by helping us acquire things we want, pay for necessities and maintain the material comforts in our daily lives. In fact, money is the most important concept that governs our lives. Without money, there would be no money!
Money has two forms, namely fiduciary money and representative money. fiduciary money is money that is invested for the benefit of others. For example, money that you contribute to a retirement account is fiduciary money. Your contributions are used to purchase retirement plans and to manage pension funds.
Representative money, on the other hand, is money that you lend, use or receive for your own private purposes. For instance, you take a paycheck from your job and use part of it to deposit checks to your bank. At the end of the month, you have all of your checkbooked checks. Your bank, however, is not your fiduciary money; instead, it exchanges its bills for your fiduciary money.
To further illustrate the importance of money, let’s examine banks and how they work. Banks are financial institutions that hold, or allow their customers to hold, claims (such as checking accounts, certificates of deposits, savings accounts, credit cards, and loans) from others. Money is created when a bank lends, or creates, a CD or a savings bond.
Central banks influence money by creating it when banks have excess funds. Money is created at the central banks through loans, credit, and deposits when the bank believes it will earn interest on its holdings. Central banks also “push money” into circulation when they feel the demand for banknotes is high. In this sense, money is created by commercial banks through credit expansion. There are two types of banks: commercial banks, which are banks that engage in activities other than banking; and government banks, which are banks that are chartered by the governments of various countries.
Commercial banks may operate through direct banking, which refers to physical branches that issue checks and deposit them in customer accounts. Bank wire transactions may be conducted through a bank’s direct banking system or via a clearinghouse. A third function performed by the central bank is that of money liquidity.
Money created through commercial bank money lending can be used for buying durable goods like houses, cars, and even vacations. Or, money may be lent to businesses so they can purchase raw materials (such as foodstuffs and clothes). Business owners may even borrow money from the central bank in order to expand their business. Finally, money that the central bank has issued is available to banks on credit, which means that the bank may lend money against an account held by an individual.
Money that is lent out by the bank, however, is usually of a higher denomination than money that the commercial banks issue. This is because the bank usually lends its own credit cards. If you take your car to the mechanic, you don’t tend to get very much money with which to do so unless you have a really good credit score. However, the amount you receive depends on how good or bad your credit rating is, and how long you take to pay your bill.
Money that is deposited into state or local governments’s accounts is called government deposit money. Examples of such deposits are Pounds Sterling that are made by the UK central bank. When these are collected from citizens, the money is returned to the bank within a short time frame and then added to the country’s supply of central bank reserves. Central banks that make these deposits are called “fed funds,” while those that lend them are called “interest bearing banks.”
Money may also be lent out to specific businesses, called circulating currencies. These include items such as fish and vegetables (called “basket money”), money carried in jewelery, and various other goods that enter into circulation when they are purchased and put back into circulation once they have been purchased. Sometimes, it may even be saved in a bank account so that it can be spent later on goods that have a high value and are in short supply, such as bank notes, lottery tickets, and stocks (the “reserve stock”).
Other types of currency are “over-the-counter” currencies that are traded directly with private parties on the open market. These are commonly used for everyday purchases such as CDs or DVDs. Money orders of this type are not backed by any physical commodity, but rather are collected by an independent agency that then issues the purchase order to the seller. This type of currency is not backed by any central bank and is usually only ever issued in quantities of one to twenty-four thousand. Money orders of this type are collected in large quantities and because they are traded on the open market, may change rapidly in price.