MBF Notes

Convertible. Convertible paper money. In the evolution of money, the second

stage was the discovery of convertible paper money as commodity money substitute.

The convertible paper money is paper money that may be redeemed for a specific

commodity at a rate specified on the currency. Before 1914, the bulk of bank notes

were convertible into gold. The bank notes of various denominations (£1, £10, £100)

had a promise a by the bank to pay to the bearer a specific amount of gold on

demand. The practice of exchanging paper currency for gold was eliminated after

1914 in England and in 1933 in America. In today's economy, the paper notes are

inconvertible notes. They are neither fully nor .fractionally convertible into gold. The

statement written on bank notes "I promise to pay the bearer on demand...." is

worthless. This paper money developed into inconvertible money is called Fiat

money.

Fiat Money. Fiat money'consists of paper money that derives its status as money

from the power of the-state. Fiat money is money because government says it is

money. It is not backed by promise to pay something of intrinsic value. It is accepted

because the government declares it a legal tender The creditors must accept it as a

medium of exchange and as payments for debts.

Credit Money. Another most important component of money supply is the deposit

money or credit money. Deposit money consists of deposits at banks and the

financial institutions which are subject to withdrawal by cheques. In developed

countries of the world, 95% of transactions are carried on with cheques. Cheques are

a safe way of transferring the ownership of deposits in financial institutions. They are

normally acceptable as a medium of exchange.

Electronic Banking Stage. In all the developed and in many developing countries of

the world, including Pakistan, the commercial banks have entered into an era of

electronic banking. The customers of banks having deposits in their accounts can

make purchases, pay bills, transfer money simply by electronic signals.

It may here be noted that currency deposits at banks and other financial institutions are money but cheques are not money A cheque is a transfer order enabling transfer of money Cheques are not legal tender and cannot be enforced in payments of debts. So is the case with plastic credit cards. The customer can make purchases by credit card upto his credit limit The credit card in itself is not money because it is not legal tender for making payment. Your card is not a unit of account, a store of value or a standard of deferred payment.