Fiat Money vs Commodity Money: A Breakdown of the Pros and Cons

Money supply growth may instead result in stable prices at a time in which they would otherwise be decreasing. Some economists maintain that with the conditions of a liquidity trap, large monetary injections are like “pushing on a string”. The adoption of fiat currency by many countries, from the 18th century onwards, made much larger variations in the supply of money possible. The hyperinflation in the Weimar Republic of Germany is a notable example.

The State sets the face valueof the tokens, and accepts them in payment of taxes WAVES at that value. The difference between the face value and the material value of a token is normally positive, and known as the seigniorage gap. A positive gap will exist only if the production of the tokens is brought under State control and limited in quantity. In the case of commodity money, the gap is small and may even be negative. A negative gap means the token is more valuable as a commodity than it is as money. If the gap becomes too negative, the public will hoard the tokens, or it will convert them to their material use and thus end their role as money.

Fiat Money vs Commodity Money

From the State’s point of view, melting cancels a financial liability but also eliminates the prospect of recapturing the real asset. •Unlike other forms of synthetic commodity money, Bitcoin has a positive, albeit declining, growth rate. “We don’t have a currency of our own,” proclaimed Nerchivan Barzani, the Kurdish regional government’s prime minister in a news interview in 2003.

https://www.beaxy.com/ money is a medium of exchange with intrinsic value due to its use for purposes other than money. Fiduciary money is a type of money that gets its value from both parties accepting it as a medium of exchange in a transaction. Whether fiduciary money is worth anything is decided by the anticipation that it will be widely recognized as a future means of trade.

What is fiat money?

Consider what happens when Lucy visits A, and she deposits $1000 dollars in her checking account. Bank A can keep $100 aside and use the rest to lend it to another client, John. The reserve requirement, in this case, is 10% of the deposit. John then uses the $900 to purchase an iPhone from another customer, Betty.

• Word about the gold standard, a gold standard is a monetary system where the country’s money has value based on the link directly to gold.
• Here we explore humanity’s journey from using gold and paper money to crypto currency as legal tender.
• The role of a mint and of coin differs between commodity money and fiat money.
• What distinguishes money from other assets in the economy?
• In the Tang Dynasty ( ), there was a high demand for metallic currency that exceeded the supply of precious metals.

Commercial banks then redeploy or repurpose this base money by credit creation through fractional reserve banking, which expands the total supply of “broad money” . Jacques de Meulles, the Intendant of Finance, conceived an ingenious ad hoc solution – the temporary issuance of paper money to pay the soldiers, in the form of playing cards. He confiscated all the playing cards in the colony, had them cut into pieces, wrote denominations on the pieces, signed them, and issued them to the soldiers as pay in lieu of gold and silver. Because of the chronic shortages of money of all types in the colonies, these cards were accepted readily by merchants and the public and circulated freely at face value. It was intended to be purely a temporary expedient, and it was not until years later that its role as a medium of exchange was recognized. The first issue of playing card money occurred during June 1685 and was redeemed three months later.

Furthermore, gold is durable, which adds even more value to it. It is hard for gold to lose its function or decay with time. In contrast to a currency backed by gold, which has inherent value due to the need for gold in jewelry and ornamentation, fiat money can decline in value and can even become worthless. You also have M0, which is the monetary base in an economy, which covers the entire currency that is either at the hands of the public or in bank reserves.

Fiat money remains today’s monetary system, but it is not set in stone. Any changes in the value of the faith in our monetary system could send us back to commodity money or the rise of a different currency such as Bitcoin. Slower Growth – fiat monies promote faster economic growth, and because of the nature of the ability to manipulate quicker, they can provide liquidity to stimulate faster economic growth. Commodity monies take longer to grow, thus leading to slower expansion. China began as the first company to use fiat currency around 1000 AD, and as recently as 1971, when Richard Nixon took the U.S. off the gold standard. Word about the gold standard, a gold standard is a monetary system where the country’s money has value based on the link directly to gold.

Washington Irving records an emergency use of fiat and commodity money money by the Spanish for a siege during the Conquest of Granada (1482–1492). In 1661, Johan Palmstruch issued the first regular paper money in the West, by royal charter from the Kingdom of Sweden, through a new institution, the Bank of Stockholm. While this private paper currency was largely a failure, the Swedish parliament eventually assumed control of the issue of paper money in the country. By 1745, its paper money was inconvertible to specie, but acceptance was mandated by the government.

• Some examples of this are the Zimbabwean dollar, China’s money during 1945 and the Weimar Republic’s mark during 1923.
• In 1980, the Fed decided that changes in the ways people were managing their money made M1 useless for policy choices.
• Currently the red books cover the participating countries on Committee on Payments and Market Infrastructures .

The first known use of gold and silver coins was in the Greek city-state of Lydia in the beginning of the seventh century B.C. The coins were fashioned from electrum, a natural mixture of gold and silver. Distinguish between commodity money and fiat money, giving examples of each.

Notes

In some way or other the maturity of these claims must be postponed to some future time. It can hardly be contested that fiat money in the strict sense of the word is theoretically conceivable. The theory of value proves the possibility of its existence. Whether fiat money has ever actually existed is, of course, another question, and one that cannot offhand be answered affirmatively. It can hardly be doubted that most of those kinds of money that are not commodity money must be classified as credit money. But only detailed historical investigation could clear this matter up.

•Commodity money is subject to supply and shocks; fiat monies can be manipulated by monetary authorities. Commodity money has intrinsic value because it has other uses besides being a medium of exchange. Fiat money serves only as a medium of exchange, because its use as such is authorized by the government; it has no intrinsic value.