Money can be grouped into three main types, namely metallic money, paper money and credit money.
Metallic money
This refers to money made of metals, such as gold, silver, bronze, nickel, brass, and aluminium.
The use of metallic money dates back centuries, and its use as a medium of exchange has been widespread throughout history.
Initially, gold and silver were the only metallic money used for monetary purposes.
However, due to the scarcity of these two precious metals, other metals like copper, brass, nickel, aluminium or bronze were used as a form of exchange.
There are two types of metallic money: standard coins and token coins.
Standard coins have a face value that is equal to their intrinsic value, meaning their value is based on the metal they are made of.
On the other hand, token coins, on the other hand, have a face value that is much higher than their intrinsic value, meaning their value is not solely based on the metal they are made of, but also on their status as a medium of exchange.
Paper Money
Paper money is official paper currency, issued by the Central bank or the Government of the country, and used to acquire goods and services.
Unlike metal money, which has intrinsic value, paper money does not have intrinsic value as its acceptability is based on trust and confidence in the issuing authority and the government.
Historically, China was the first country in the world to make use of paper currency in the 9th currency, but paper money gained widespread acceptance in the 17th and 18th centuries
Paper money is also referred to as fiat money, which means "money by decree or command."
This means that paper currency is made legal tender by the law or a government decree, making it mandatory for the receiver to accept it as a form of payment.
Paper money is considered legal tender and must be accepted as a form of payment as per the law of a country.
Credit Money
Credit money is a form of money that is created and used within a financial system, primarily as a result of borrowing and lending activities.
Credit money is created when individuals and businesses borrow money from banks and other financial institutions, and it is used when these funds are loaned out to other individuals and businesses.
Credit money is not backed by a physical commodity, but rather by the trust and confidence that it can be used as a medium of exchange and will be accepted by others in transactions.
Checks, drafts, and other forms of future money claims against an individual that can be used to buy goods and services are examples of credit money
Although credit money is widely used as a means of payment for goods and services, they are not considered legal tender since individuals are not legally compelled to accept them as a means of payment.
For example, we see individuals pay for goods and services using checks in our world today
Because credit money does not carry general acceptability like paper currency, they are often referred to as optional money.