Commodity Money: Any article that serves both as a consumer good and as money is called commodity money. Examples include coffee, chocolate, soap, cattie and cigarettes. Most of the early forms of money were of this type. Commodity money had the following disadvantages:- Some commodities like cattle and sisal and coal were difficult or awkward to handle or look after. Many of the commodities depreciated or lost value as time passed. Some commodities like iron bars, salt and coal were heavy, costly and unsafe to transport or move about with, -Some like animals were indivisible.

Metallic Currency: After commodity money came metallic currency. This was composed of metal bars and coins of previous metals like iron, gold, silver and others. Metallic currency had the advantage of being durable, divisible and being wanted for its own

The major disadvantages included:-

Ease of forgery. Some unscrupulous people could clip scraps of the precious metal from their edges or mix the pure metal with inferior ones.

Some countries did not have any of these metals.   

Many countries encouraged the importation of gold and other metals but discouraged their exports.

Metals are bulky and costly to transport. To overcome the problem of forgery coins were manufactured milled edges.  Even to-day our coins retain the milled edge.

Paper Money: Because of the disadvantages of metallic currency mentioned above, paper money was introduced to meet the growing needs of trade and the coins were reserved for effecting small transactions.

The early notes to circulate as money were receipts issued by Goldsmiths. These were rich gold merchants whose main business was trade in gold. Because of their strong rooms, they were entrusted with the safe-keeping of these precious metal on behalf of their clients.

In exchange for the deposits or gold bars and coins, the goldsmiths issued receipt promising to repay the amounts on demand. In order to buy anything one had to return the receipt then collect the gold to use, which gold could be deposited with the same Goldsmith by the seller of the goods. Soon or later instead of collecting the gold, traders began to transfer the gold receipts in exchange for goods and services.

As the goldsmith were well known and trusted, their promissory notes began to circulate as money among merchants as a form of currency is settlement of debts. To encourage this the goldsmiths began to issue receipts in convenient denominations such as #5, #10, #20, #50, #100, and so on.

Thus the goldsmiths receipts were forerunners of our present day bank notes. Today's notes are issued by the Central Bank and unlike the goldsmiths receipts they are not promises to pay anything on demand but they are money in their own right.

Fiduciary Issue: A fiduciary issue is that amount of money backed by government securities and not gold.

Legal Tender: Legal lender be defined as money which must be accepted when offered in payment. Bank notes and coins are legal tender. Their circulation is enforced by the government. Cheques are only a claim to money. They may not be acceptable as a medium of exchange. They are not legal tender.

Token Money: This refers to coins and notes whose value as money is in excess of the value of the materials out of which the coins and notes are made. Thus token coins are worth more as money than the metal from which they are made. In other words if you melted a one-shilling coin and tried to sell it as metal, you would receive less than a shilling for it. This type of money is the most convenient for effecting transactions involving very small amounts of money.