ommodity money

Main article: Commodity money

Commodity money value comes from the commodity out of which it is made. The
commodity itself constitutes the money, and the money is the commodity.
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Examles of
commodities that have !een used as mediums of exchan"e include "old, silver, coer,
rice, salt, eercorns, lar"e stones, decorated !elts, shells, alcohol, ci"arettes, canna!is,
candy, !arley, etc. These items were sometimes used in a metric of erceived value in
con#unction to one another, in various commodity valuation or $rice %ystem economies.
&se of commodity money is similar to !arter, !ut a commodity money rovides a simle
and automatic unit of account for the commodity which is !ein" used as money.
Representative money
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article !y addin" citations to relia!le sources. &nverifia!le material may !e
challen"ed and removed. (June 2009)
Main article: 'eresentative money
'eresentative money is money that consists of to(en coins, other hysical to(ens such
as certificates, and even non)hysical *di"ital certificates* +authenticated di"ital
transactions, that can !e relia!ly exchan"ed for a fixed -uantity of a commodity such as
"old, silver or otentially water, oil or food. 'eresentative money thus stands in direct
and fixed relation to the commodity which !ac(s it, while not itself !ein" comosed of
that commodity.
The "old standard, !ased on aer notes that are normally freely converti!le into fixed
-uantities of "old, is the most common form of reresentative money. .t was adoted !y
most of the industriali/ed countries durin" the 18th and 10th centuries.
Fiat money
1an(notes from all around the world donated !y visitors to the 1ritish Museum, 2ondon.
Main article: 3iat money
3iat money or fiat currency is money whose value is not derived from any intrinsic value
or "uarantee that it can !e converted into a valua!le commodity +such as "old,. .nstead, it
has value only !y "overnment order +fiat,. &sually, the "overnment declares the fiat
currency +tyically notes and coins from a central !an(, such as the 3ederal 'eserve
%ystem in the &.%., to !e le"al tender, ma(in" it unlawful to not accet the fiat currency
as a means of reayment for all de!ts, u!lic and rivate.
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3iat money may !e sym!olic of a commodity +e.". the &6 $ound sterlin",, !ut it does not
carry a "uarantee that it can !e traded directly for fixed -uantities of anythin", other than
the same "overnment7s money. 3iat monies usually trade a"ainst each other in an
international mar(et, and can chan"e value, as with other "oods. Thus the num!er of &.%.
dollars or 8aanese yen which are e-uivalent to each other, or to a "ram of "old, are all
mar(et decisions which chan"e from moment to moment. 9n excetion to this is when a
"overnment imlements a fixed exchan"e rate, and loc(s the value of its currency versus
the currency of another +usually lar"er, tradin" artner. 3or examle, the 1eli/e dollar
trades in fixed roortion +at 4:1, to the &.%. dollar.
3iat money, if hysically reresented in the form of currency +aer or coins, can !e
accidentally dama"ed or destroyed. :owever, fiat money has an advanta"e over
reresentative or commodity money, in that the same laws that created the money can
also define rules for its relacement in case of dama"e or destruction. 3or examle, the
&.%. "overnment will relace mutilated 3ederal 'eserve notes +&.%. fiat money, if at
least half of the hysical note can !e reconstructed, or if it can !e otherwise roven to
have !een destroyed.
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1y contrast, commodity money which has !een lost or destroyed
cannot !e recovered.
Credit money
Main article: Credit money
Credit money is any claim a"ainst a hysical or le"al erson that can !e used for the
urchase of "oods and services.
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Credit money differs from commodity and fiat money
in two ways: .t is not aya!le on demand +althou"h in the case of fiat money, *demand
ayment* is a urely sym!olic act since all that can !e demanded is other tyes of fiat
currency, and there is some element of ris( that the real value uon fulfillment of the
claim will not !e e-ual to real value exected at the time of urchase.
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This ris( comes a!out in two ways and affects both !uyer and seller. 3irst it is a claim and
the claimant may default +not ay,. :i"h levels of default have destructive suly side
effects. .f manufacturers and service roviders do not receive ayment for the "oods they
roduce, they will not have the resources to !uy the la!or and materials needed to
roduce new "oods and services. This reduces suly, increases rices and raises
unemloyment, ossi!ly tri""erin" a eriod of sta"flation. .n extreme cases, widesread
defaults can cause a lac( of confidence in lendin" institutions and lead to economic
deression. 3or examle, a!use of credit arran"ements is considered one of the
si"nificant causes of the ;reat <eression of the 10=5s.
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The second source of ris( is time. Credit money is a romise of future ayment. .f the
interest rate on the claim fails to comensate for the com!ined imact of the inflation +or
deflation, rate and the time value of money, the seller will receive less real value than
anticiated. .f the interest rate on the claim overcomensates, the !uyer will ay more
than exected. The rocess of fractional)reserve !an(in" has a cumulative effect of
money creation !y !an(s.
3iduciary money
>henever a !an( issues credi!le romises to ay in some other form of money,
and the romises are transfera!le, they can circulate as money. 1an( money is
also called *fiduciary money,* since it is !ased on the trust eole have that the
!an( will (ee faith +fides, and ay as romised. 3iduciary money may !e !ased
on romises to ay in commodity money +"old coin, for examle, or in fiat
money. >e will "o into much more detail later, !ecause modern monetary systems
are lar"ely fiduciary. Two ma#or instances of fiduciary money are
!an( notes
These are !ills issued !y !an(s. They were widely used in the nineteenth century
and are still used in some countries.
chec(in" accounts
.n our society, chec(s are acceta!le as money, so !y the definition of money )) a
commodity or to(en that serves as a medium of exchan"e )) chec(s are money,
#ust as real as any other (ind of money.
1.<ifficulty of dou!le coincidence of wants
<ou!le coincidence of wants imlies that "oods in the ossession of two different
individuals must !e useful and needed !y each other.
4.2ac( of common unit of value
>e can7t develo any system of account when there is no common unit of value and when
commodity is valued in terms of other commodities in the mar(et and there is no money
valued.
=.2ac( of a system for future ayments or contractual ayments
Contractual ayments or future ayments would certainly !e very difficult under !arter
system of exchan"e.
?.2ac( of system for stora"e of value
1ecos of lac( of money in the C)c economy or !arter economy wealth is stored in terms
of "oods.:owever store of wealth in terms of "oods is su!#ect to some ro!lems such as
cost of stora"e,loss of value etc.