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Types of Money

There are three main types of money: 1. Commodity money, such as gold and silver coins, where the commodity itself has value and is used as the standard unit of value. The supply is limited by the costs of mining and refining the commodity. 2. Fiduciary money, such as paper bank notes, where paper is used but promises to be redeemed for a commodity like gold or silver. The supply is limited by the requirement of redemption. 3. Fiat money, which is paper that the issuer does not promise to redeem, so its supply cannot be self-limited and value depends on confidence in the issuer. Historically, fiat monies have lost value

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234 views

Types of Money

There are three main types of money: 1. Commodity money, such as gold and silver coins, where the commodity itself has value and is used as the standard unit of value. The supply is limited by the costs of mining and refining the commodity. 2. Fiduciary money, such as paper bank notes, where paper is used but promises to be redeemed for a commodity like gold or silver. The supply is limited by the requirement of redemption. 3. Fiat money, which is paper that the issuer does not promise to redeem, so its supply cannot be self-limited and value depends on confidence in the issuer. Historically, fiat monies have lost value

Uploaded by

Nica Stefan Cristian
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Types of money

There are several basic types of money in the world. It helps to have accurate definitions.

I-Commodity Money
A medium of exchange the units of which are fixed amounts of an actual commodity that
has value other than as money alone. Historically, silver and gold coins of known, standard
weights and designs have emerged as the preferred commodity monies of the entire civilized
world. In the case of a commodity money, the actual commodity - silver or gold - is both the
medium of exchange and the standard of value (that is, the unit in which prices are stated in the
marketplace).
The supply of commodity money is self-limited by the costs of mining, refining, and
coining silver and gold. New supplies of commodity money will be coined only to the extent that
coinage is economically profitable in comparison to alternative investments of the capital needed
to mine the precious metals.

II-Fiduciary Money
A medium of exchange composed of some intrinsically valueless substance (such as
paper) which the issuer promises to redeem on demand in a commodity money (such as silver or
gold coin) or in a monetary commodity (such as silver or gold bullion). Historically, private bank
notes and government treasury notes were fiduciary monies in general circulation prior to the
1930s. In the case of a fiduciary money, the paper promise to pay is the medium of day-to-day
exchange, but the actual money and the ultimate standard of value remains the promised medium
of payment, the silver or gold coin with which the note is to be redeemed.
The supply of a fiduciary money is also self limited by the requirement of redemption. In
a free market system, new supplies of a fiduciary money will be issued only to the extent the
issuer is confident it can satisfy demands for redemption of its notes in a commodity money. The
condition "in a free-market system" is crucial, because the self-limiting aspect of fiduciary
money historically has failed in an economic regime in which the government or powerful
private interests license the issuers of fiduciary monies to suspend or repudiate entirely their
promises to redeem those monies on demand in coin.

III-Fiat Money
A medium of exchange composed of some intrinsically valueless substance which the
issuer does not promise to redeem in a commodity or a fiduciary money. Because a fiat money
has no direct legal connection to a commodity money (in terms of redemption) and, therefore, no
real economic cost to its production, the supply of a fiat money can never be self-limiting; and
the value of a fiat money is always largely a matter of public confidence in the economic or
political stability of the issuer.
For these reasons, historically every major fiat money have self-destructed in what is
popularly called "hyperinflation" (that is, extreme decreases in purchasing-power) caused by
either unlimited increases in the supply of that fiat money by the issuer or accelerating loss of
public confidence in the continued value of the money or the economic or political fortunes of its
issuer, or both.

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