27 Jan Four different types of money????
Woah, there are FOUR different types of money?
Let’s talk for a moment about money. It is what makes the world go around and we all would like to have a little more. Whether we want to pay down debt, go on a long-overdue vacation or squirrel away more for retirement. This list could go on and on. But did you know there are 4 basic types of money and they each have three functions? Virtually anything can be considered money, as long as it performs what we call the 3 major functions of money and they are medium of exchange, the store of value and unit of account. It is not surprising that there were so many different types of money throughout history. Understanding money helps us understand the best ways to make it, spend it, and save it. Let’s start with the one we all use every day.
FIAT Money
So, we all know, or should know, that Fiat gets its value from a government order. This money is not backed by any physical commodity, just the government’s word and the orders are legal. Which in short means all people and firms within that country are required to accept it as a means of payment. That’s scary!
Commodity Money
Most of us should be familiar with commodity money. This is the simplest form of money and most likely the oldest form. Commodity works best in a barter system, where goods or services are exchanged for other goods or services. For example, you need your Rolex watched repaired but don’t have much fiat money laying around to use because you have invested it all, but you do have three old mantle clocks that you don’t need now. So, you head down to the watch shop and make the exchange. Your exchange three clocks for him to fix your Rolex. You have both gained something valuable. I barter all the time. Gold, silver, beads, shells, spices, and rubies are just a few examples of commodity money.
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Fiduciary Money
The value of this type of money depends on the confidence that it will be generally excepted as a medium of exchange by other parties. It is not ordered by the government so it is not legal tender. OK that sounds promising, right? But that isn’t always the case.
But we use this form every day as well in the form of checks, banknotes, and drafts.
So basically, as long as the issuer of the fiduciary form of money promises to pay back with either fiat money or a commodity, we’re all happy.
Commercial Money
Commercial bank money can be described as claims against financial institutions that can be used to purchase goods or services. It represents the portion of a currency that is made of debt generated by commercial banks. More specifically, commercial bank money is created through what we call fractional reserve banking. In short, this is a process where commercial banks give out loans worth more than the value of the actual currency they hold. In essence, commercial bank money is debt generated by commercial banks that can be exchanged for “real” money or to buy goods and services.
To sum this up Holly Ships Batman, I’m a commodity guy myself but I do understand why we need to evolve to the other forms. That doesn’t always mean I like it and it seems to me at some point we just may go back to it, but in this economy, we have to be flexible.
Wait! I forgot there is one more form of money! (I guess there are really five types!)
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