Kinds of Money

Money is not a single, uniform thing — a modern economy uses several distinct forms of money side by side, classified mainly by how they are backed and how directly they can settle a transaction.

By legal backing:

• Legal tender money — money that a creditor is legally bound to accept in settlement of a debt; it is further split into unlimited legal tender (which must be accepted for any amount — currency notes issued by the RBI in India) and limited legal tender (which must be accepted only up to a specified amount — coins of small denomination, which a creditor may legally refuse beyond that limit).
• Fiat money — money that derives its value purely from government order (fiat) and law, not from any intrinsic worth of the material it is made from; almost all of today's currency, including Indian currency notes, is fiat money.
• Non-legal-tender (optional) money — money that is widely accepted by custom and general convenience, even though the law does not compel anyone to accept it — a cheque is the standard example: a seller may accept it, but is not legally bound to.

By form:

• Commodity and metallic money — money whose material itself carried value historically (covered under the evolution of money above).
• Paper money — currency notes issued by the central bank, accepted on the strength of legal sanction and public confidence rather than any value of the paper itself.
• Credit (bank) money — money that exists as a bank record rather than as physical currency: demand deposits transferable by cheque, and funds moved electronically through NEFT, RTGS, or similar systems.
• Plastic and digital money — debit cards, credit cards, and mobile-linked payment systems (UPI, digital wallets), which let a bank deposit be spent directly without drawing out physical cash first. …