Under a metallic standard, the value of money and currency is determined by a specific metal, typically gold or silver. In this system, standard coins are minted so that their face value is equal to their intrinsic metal value.
Types of Metallic Standards
- Gold Standard: The value of the monetary unit or standard currency is directly linked with gold .
- Silver Standard: A standard economic unit of account is defined as a fixed weight of silver.
- Historical examples include the Silver Tanka and the Sher Shah Suri Rupiyah silver coin
Classification of Coins
Within metallic systems, coins are generally categorized by the relationship between their face value and their actual metal content:
- Full Bodied Coins: These are coins whose intrinsic value is equal to or more than their face value .This means the metal content itself is worth as much as the denomination stamped on the coin
- For example, during the Mughal Empire, gold and silver coins were minted with a face value equivalent to the metal they contained
- Token Coins: These coins have an intrinsic value less than their face value . They are typically made of inexpensive materials, such as base metals or alloys, and derive their value from the authority or trust placed in the issuer and the community
- Modern Indian coins, like the 10 Rupee coin, are considered token coins.
Challenges of the Metallic Standard
- Hoarding: If the intrinsic value of the metal in a coin becomes higher than its face value, people tend to hoard the money rather than spend it.
- Melting: When the metal’s value exceeds the coin’s denomination, coins may be melted down and sold as bullion for a profit.
- Debasement: This occurs when an issuing authority (such as a treasury) decreases the amount of metal in coins while claiming they maintain their original value. This typically happens when the authority is low on funds and often leads to inflation.
To help visualize this, a full-bodied coin is like a solid chocolate bar sold for the price of the chocolate it contains; if the price of cocoa goes up, the bar is worth more than its original price. A token coin is like a coupon for that chocolate bar; the paper itself has no value, but you trust the store to honor the value written on it.