TYPES of MONEY

Commodity

Main article: Commodity money

A 1914 British gold sovereign

Many items have been used as commodity money such as naturally scarce precious metals, conch
shells, barley, beads, etc., as well as many other things that are thought of as having value.
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.[30] Examples of commodities that have been
used as mediums of exchange include gold, silver, copper, rice, Wampum, salt, peppercorns, large
stones, decorated belts, shells, alcohol, cigarettes, cannabis, candy, etc. These items were sometimes
used in a metric of perceived value in conjunction with one another, in various commodity
valuation or price system economies. The use of commodity money is similar to barter, but a
commodity money provides a simple and automatic unit of account for the commodity which is
being used as money. Although some gold coins such as the Krugerrand are considered legal tender,
there is no record of their face value on either side of the coin. The rationale for this is that
emphasis is laid on their direct link to the prevailing value of their fine gold content.[31] American
Eagles are imprinted with their gold content and legal tender face value.[32]

Representative

Main article: Representative money

In 1875, the British economist William Stanley Jevons described the money used at the time as
"representative money". Representative money is money that consists of token coins, paper money
or other physical tokens such as certificates, that can be reliably exchanged for a fixed quantity of a
commodity such as gold or silver. The value of representative money stands in direct and fixed
relation to the commodity that backs it, while not itself being composed of that commodity.[33]

Fiat

Main article: Fiat money

Gold coins are an example of legal tender that are traded for their intrinsic value, rather than their
face value.
Fiat money or fiat currency is money whose value is not derived from any intrinsic value or
guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value
only by government order (fiat). Usually, the government declares the fiat currency (typically notes
and coins from a central bank, such as the Federal Reserve System in the U.S.) to be legal tender,
making it unlawful not to accept the fiat currency as a means of repayment for all debts, public and
private.[34][35]

Some bullion coins such as the Australian Gold Nugget and American Eagle are legal tender,
however, they trade based on the market price of the metal content as a commodity, rather than their
legal tender face value (which is usually only a small fraction of their bullion value).[32][36]
Fiat money, if physically represented in the form of currency (paper or coins), can be accidentally
damaged or destroyed. However, fiat money has an advantage over representative or commodity
money, in that the same laws that created the money can also define rules for its replacement in case
of damage or destruction. For example, the U.S. government will replace mutilated Federal Reserve
Notes (U.S. fiat money) if at least half of the physical note can be reconstructed, or if it can be
otherwise proven to have been destroyed.[37] By contrast, commodity money that has been lost or
destroyed cannot be recovered.

Coinage

Main article: Coin

These factors led to the shift of the store of value being the metal itself: at first silver, then both
silver and gold, and at one point there was bronze as well. Now we have copper coins and other
non-precious metals as coins. Metals were mined, weighed, and stamped into coins. This was to
assure the individual taking the coin that he was getting a certain known weight of precious metal.
Coins could be counterfeited, but they also created a new unit of account, which helped lead to
banking. Archimedes' principle provided the next link: coins could now be easily tested for their
fine weight of the metal, and thus the value of a coin could be determined, even if it had been
shaved, debased or otherwise tampered with (see Numismatics).

In most major economies using coinage, copper, silver, and gold formed three tiers of coins. Gold
coins were used for large purchases, payment of the military, and backing of state activities. Silver
coins were used for midsized transactions, and as a unit of account for taxes, dues, contracts, and
fealty, while copper coins represented the coinage of common transaction. This system had been
used in ancient India since the time of the Mahajanapadas. In Europe, this system worked through
the medieval period because there was virtually no new gold, silver, or copper introduced through
mining or conquest.[citation needed] Thus the overall ratios of the three coinages remained roughly
equivalent.

Paper

Main article: Banknote

Huizi currency, issued in 1160

In premodern China, the need for credit and for circulating a medium that was less of a burden than
exchanging thousands of copper coins led to the introduction of paper money, commonly known
today as "banknote"s. This economic phenomenon was a slow and gradual process that took place
from the late Tang dynasty (618–907) into the Song dynasty (960–1279). It began as a means for
merchants to exchange heavy coinage for receipts of deposit issued as promissory notes from shops
of wholesalers, notes that were valid for temporary use in a small regional territory. In the 10th
century, the Song dynasty government began circulating these notes amongst the traders in their
monopolized salt industry. The Song government granted several shops the sole right to issue
banknotes, and in the early 12th century the government finally took over these shops to produce
state-issued currency. Yet the banknotes issued were still regionally valid and temporary; it was not
until the mid 13th century that a standard and uniform government issue of paper money was made
into an acceptable nationwide currency. The already widespread methods of woodblock printing and
then Pi Sheng's movable type printing by the 11th century was the impetus for the massive
production of paper money in premodern China.
Paper money from different countries
At around the same time in the medieval Islamic world, a vigorous monetary economy was created
during the 7th–12th centuries on the basis of the expanding levels of circulation of a stable high-
value currency (the dinar). Innovations introduced by economists, traders and merchants of the
Muslim world include the earliest uses of credit,[38] cheques, savings accounts, transactional
accounts, loaning, trusts, exchange rates, the transfer of credit and debt,[39] and banking institutions
for loans and deposits.[39][need quotation to verify]

In Europe, paper money was first introduced in Sweden in 1661. Sweden was rich in copper, thus,
because of copper's low value, extraordinarily big coins (often weighing several kilograms) had to
be made. The advantages of paper currency were numerous: it reduced transport of gold and silver,
and thus lowered the risks; it made loaning gold or silver at interest easier since the specie (gold or
silver) never left the possession of the lender until someone else redeemed the note; it allowed for a
division of currency into credit and specie backed forms. It enabled the sale of stock in joint stock
companies, and the redemption of those shares in the paper.

However, these advantages are held within their disadvantages. First, since a note has no intrinsic
value, there was nothing to stop issuing authorities from printing more of it than they had specie to
back it with. Second, because it increased the money supply, it increased inflationary pressures, a
fact observed by David Hume in the 18th century. The result is that paper money would often lead
to an inflationary bubble, which could collapse if people began demanding hard money, causing the
demand for paper notes to fall to zero. The printing of paper money was also associated with wars,
and financing of wars, and therefore regarded as part of maintaining a standing army. For these
reasons, paper currency was held in suspicion and hostility in Europe and America. It was also
addictive since the speculative profits of trade and capital creation were quite large. Major nations
established mints to print money and mint coins, and branches of their treasury to collect taxes and
hold gold and silver stock.

At this time both silver and gold were considered legal tender, and accepted by governments for
taxes. However, the instability in the ratio between the two grew over the 19th century, with the
increase both in the supply of these metals, particularly silver, and of trade. This is called
bimetallism and the attempt to create a bimetallic standard where both gold and silver backed
currency remained in circulation occupied the efforts of inflationists. Governments at this point
could use currency as an instrument of policy, printing paper currency such as the United States
greenback, to pay for military expenditures. They could also set the terms at which they would
redeem notes for specie, by limiting the amount of purchase, or the minimum amount that could be
redeemed.

Banknotes of different currencies with a face value of 5000

By 1900, most of the industrializing nations were on some form of a gold standard, with paper notes
and silver coins constituting the circulating medium. Private banks and governments across the
world followed Gresham's law: keeping gold and silver paid but paying out in notes. This did not
happen all around the world at the same time, but occurred sporadically, generally in times of war
or financial crisis, beginning in the early part of the 20th century and continuing across the world
until the late 20th century, when the regime of floating fiat currencies came into force. One of the
last countries to break away from the gold standard was the United States in 1971.

No country anywhere in the world today has an enforceable gold standard or silver standard
currency system.
Commercial bank

Main article: Demand deposit

A check, used as a means of converting funds in a demand deposit to cash

Commercial bank money or demand deposits are claims against financial institutions that can be
used for the purchase of goods and services. A demand deposit account is an account from which
funds can be withdrawn at any time by check or cash withdrawal without giving the bank or
financial institution any prior notice. Banks have the legal obligation to return funds held in demand
deposits immediately upon demand (or 'at call'). Demand deposit withdrawals can be performed in
person, via checks or bank drafts, using automatic teller machines (ATMs), or through online
banking.[40]

Commercial bank money is created through fractional-reserve banking, the banking practise where
banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and
lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits
upon demand.[41][page needed][42] Commercial bank money differs from commodity and fiat money in two
ways: firstly it is non-physical, as its existence is only reflected in the account ledgers of banks and
other financial institutions, and secondly, there is some element of risk that the claim will not be
fulfilled if the financial institution becomes insolvent. The process of fractional-reserve banking has
a cumulative effect of money creation by commercial banks, as it expands the money supply (cash
and demand deposits) beyond what it would otherwise be. Because of the prevalence of fractional
reserve banking, the broad money supply of most countries is a multiple (greater than 1) of the
amount of base money created by the country's central bank. That multiple (called the money
multiplier) is determined by the reserve requirement or other financial ratio requirements imposed
by financial regulators.

The money supply of a country is usually held to be the total amount of currency in circulation plus
the total value of checking and savings deposits in the commercial banks in the country. In modern
economies, relatively little of the money supply is in physical currency. For example, in December
2010 in the U.S., of the $8853.4 billion in broad money supply (M2), only $915.7 billion (about
10%) consisted of physical coins and paper money.[43]

Digital or electronic

Main article: Digital money

The development of computer technology in the second part of the twentieth century allowed
money to be represented digitally. By 1990, in the United States all money transferred between its
central bank and commercial banks was in electronic form. By the 2000s most money existed as
digital currency in bank databases.[44] In 2012, by number of transaction, 20 to 58 percent of
transactions were electronic (dependent on country).[45]

Non-national digital currencies were developed in the early 2000s. In particular, Flooz and Beenz
had gained momentum before the Dot-com bubble.[citation needed] Not much innovation occurred until
the conception of Bitcoin in 2008, which introduced the concept of a cryptocurrency – a
decentralised trustless currency.[46]