When you talk of money, most people think about the cash in their wallets, bank accounts, and credit cards. By definition, we can define money as any acceptable medium of exchange for goods or services. This means that virtually anything can qualify as types of money, provided it can fulfill all three major functions of money.
In this article, we’ll look at four different types of money that have existed throughout history. But first, it’s important to understand what’s money and the three main functions that it serves.
Different Types of Money
Money has been an essential part of human society for thousands of years, serving as a means of commerce, a store of value, and a unit of account. Throughout history, a variety of types of money have arisen to fulfill the shifting demands of civilizations. Over time, the concept of money has undergone substantial transformation, moving from straightforward barter systems to modern digital currencies. This article will cover the numerous types of money that have existed and are still in use in our global economy.
Commodity money is the oldest and the simplest type of currency in the world. It uses scarce natural resources that work as a unit of account, store of value, and medium of exchange. This type of currency has its origins in the barter trade system, where goods and services are exchanged for other commodities.
The most important aspect to understand about this form of money is that its value is determined by the intrinsic value of the commodity. Basically, the commodity itself is the money, making it immune to inflation and guaranteeing monetary stability. Some of the best examples of commodity money include silver, gold, diamond, and other precious metals or stones.
Fiat currency gets its value from the government’s monetary system. That means the government is responsible for declaring this type of currency as a legal tender, which requires all individuals and businesses across their jurisdiction to accept it. If they don’t accept the government-issued order, they might be fined or put in prison.
Unlike commodity currency, fiat money lacks backing from a physical commodity, but the business world widely accepts it. However, the value of fiat money relies heavily on the relationship between its demand and supply, the monetary
Most financial systems today in the current economy are based on fiat currencies as they’re readily acceptable in the business world. For instance, you can use fiat currency to shop online and place wagers in Aussie casinos for real money.
Examples of fiat currencies commonly used at Australian online casinos for real money include the US dollar, Euro, Pounds and others. These fiat currencies are also used in traditional gaming and completing other financial transactions online and offline.
Community currencies, also known as local currencies, support local economic development alongside national currencies in some areas. Local governments or organizations frequently issue these currencies, and they only have recognition within that region. The design of local currencies aims to support small businesses and promote community spending.
People determine the value of fiduciary currency based on their confidence in its acceptance as a store of value or medium of exchange. Unlike fiat money, no government declares fiduciary money as legal tender, so people are not legally obligated to accept it as a form of payment.
Fiduciary money operates based on the issuer’s commitment to exchanging it for either fiat currency or a specified commodity upon the bearer’s request. This system resembles standard fiat currency. Users must have confidence in the issuer’s commitment, and the money must remain unaffected by significant inflation to maintain its value.
Examples of fiduciary money include banknotes, cheques, or drafts. Modern financial experts also consider cryptocurrencies like Ethereum, Bitcoin, and Litecoin as fiduciary money. However, several proponents suggest cryptocurrencies are an entirely new class of money.
Guarantors guarantee the exchange of representative money for a specific amount of a good (typically a precious metal) upon request. In the past, representation money simplified large transactions that would have been complicated with actual commodity money.
Initially, the American dollar was a form of fiat money backed by gold. Over time, a great number of countries switched from representational money to pure fiat money.
Commercial Bank Money
Commercial bank money is a form of currency that individuals can use to purchase goods and services. It represents the portion of money that commercial banks create through bank deposits, which in turn, generates monetary claims against these financial organizations.
In simple terms, commercial bank money is developed in a banking system through the process of fractional reserve banking. With the fractional reserve banking process, the bank only holds a fraction of the actual currency they have as liquid cash.
Essentially, commercial bank money refers to the debt generated by banks when accepting deposits from their customers. This debt can be exchanged for goods and services or for real fiat money.
Electronic (Digital) money is any form of currency that solely exists online and is utilized for online transactions. Digital representations exist for both traditional fiat currency and cryptocurrencies.
Debit and credit cards, as well as online payment systems like PayPal and Venmo, are examples of digital money. Along with the growth of smartphones and internet accessibility, digital money has become more and more popular for both financial and ordinary activities.
What’s the Function of Money?
As earlier mentioned, money can be defined as a medium of exchange used for facilitating transactions. It can take the form of physical currency like bank notes and coins or digital currency like cryptocurrency and credit card payments. That shows that anything can be money provided it serves these three main functions:
- Medium of exchange: Used for buying goods or services.
- Store of value: It can be save for later use.
- Unit of account: It provides a standard of measure for goods and services.
There are common types of money available worldwide. These types include commodity money, fiat currency, commercial bank money, and fiduciary money. Commodity money derives its value from the intrinsic worth of the commodities used as a medium of exchange. In contrast, fiat currency obtains its value through government order. Fiduciary money’s acceptance as a medium of exchange is based on confidence. Banking institutions receive deposits, and these deposits give rise to claims against them, which commercial bank money represents. People can use commercial bank money to purchase goods or services.
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