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


In 1913, the Reserve was created and given the power to steer the economy by controlling the money supply and interest rates on loans. It serves as a sound currency if it can perform the functions of a monetary unit that a nation’s economy requires—storing value, providing a numerical account, and enabling commerce. You can make online purchases as well as in-store ones assuming that the venue accepts Bitcoin. This is an excellent way to make direct transactions with Bitcoin to buy goods and services.

Is euro a commodity money?

Fiat currency stems from a term that can be translated to “it shall be” in Latin, and refers to a type of currency that's issued by the government and is not backed by physical commodities, such as gold. The U.S. dollar, the euro, and the pound are examples of fiat money.

To organize production and to distribute goods and services among their populations, before market economies existed, people relied on tradition, top-down command, or community cooperation. Relations of reciprocity, and/or redistribution, substituted for market exchange. Conversely, fiat money meaning signifies a currency backed by the full credit of the government.

Advantages And Disadvantages Of Fiat Money

Some people have tried to address this issue by creating what are called stablecoins, but this solution also has its problems. One solution to stabilize stablecoins is to establish a one-to-one correspondence with a fiat currency, such as the US dollar. However, that would require a central authority who can control the supply of stablecoins while standing ready to exchange the stablecoins for a fiat currency. The problem with this proposed solution is that stablecoins do not have fiat value, so they have no real value; few people accept it as a means of payment. The problem with these solutions is that they are placing the cart before the horse.

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For centuries, gold was used to back paper currency—up until the 1970s. There’s no denying that the negatives of the fiat money system are too unsustainable for the status quo to remain unchanged for another half a century. Andrea Antonopoulos, one of the more popular crypto believers, has said that cryptocurrency is the first step toward separating state and money. After the first and second World Wars, European countries lost their gold reserves by financing their military efforts and importing foreign goods. In the current age of technology, the answer to this question is placed on the blockchain.

Medium of Exchange

All examples of commodity moneys and their transactions are stored in the blockchain, and nowhere else. People keep the cryptographic keys used to transact on the blockchain, but the Bitcoins and transactions exist only within the blockchain. Furthermore, many copies of the blockchain are stored on the Internet in various places.

That differs from currency backed by gold, for example; it has intrinsic value because of the demand for gold in jewelry and decoration as well as the manufacture of electronic devices, computers, and aerospace vehicles. Another way that commodity money sees inflation is through the debasement of the currency. Debasement means that money, typically metal coins, is devalued because there is less precious metal in the coin than the value stamped on its face. Governments may debase coins by adding copper, tin, or other less valuable alloys to coins as they are minted, while still saying they are worth (e.g., $1 in exchange).

The Value of Money Must Be Stable: The Problem with Using Bitcoin and Gold as Money

In the 17th and early 18th centuries, for example, American colonists used beaver pelts and dried corn in transactions. Bartering was one way that people exchanged goods for other goods before money was created. Money is a medium of exchange; it allows people and businesses to obtain what they need to live and thrive. The Chinese gold yuan was a defunct legal tender currency of China between August 1948 and 1949. It was a method used by the Republic of China government to WAVES accumulate gold from its citizens in preparation to relocate to Taiwan.

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Gold or other metals are sometimes used in a price system as a durable, easily warehoused store of value . Rather, it conveys a legal tender whose worth is fixed by the issuing government and the supply and demand relationship. Additionally, it is not supported by any physical commodity and is determined as per the administration’s stability.

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Economists say that the invention of money belongs in the same category as the great inventions of ancient times, such as the wheel and the inclined plane, but how did money develop? Early forms of money were often commodity money-money that had value because it was made of a substance that had value. Gold coins were valuable because they could be used in exchange for other goods or services, but also because the gold itself was valued and had other uses. Since 2012, Bitcoin has dropped in price, sometimes substantially, even as the consumer price index continually increased. Of course, after the start of the Covid-19 pandemic, the price of Bitcoin increased rapidly, but it may not continue.

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This assertion, that the economy’s growth rate would be suppressed, is unproven. As agricultural harvests grew, many civilizations used grains as the bedrock of their economies. Ancient Rome was an agrarian society, and wheat was commonly used as money. Similarly, corn has been used as money throughout Europe from the time of the Ancient Greeks right up to the period of the industrial revolution. The price of all manner of tradable items would be quoted in terms of an equivalent number of oxen, meaning that cattle served as a unit of account.


It also allows for fractional reserve banking, which allows commercial banks to multiply the amount of money on hand to meet demand from borrowers. In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. For instance, in addition to being commodity money, cigarettes can be smoked, while gold and silver can be used for making pieces of jewelry.

The commodities that have historically taken off are all easy to trade and convenient. During this period, Lydian merchants produced a gold coin mixed with silver; otherwise known as electrum. Their aim was to help improve the efficiency of trading between countries. It was a useful store of value, it was durable, and it was widely accepted between nations. Later, in 550 B.C., under the order of King Croesus of Lydia, it went into full circulation. That means it has value in and of itself, with people trading it freely in the knowledge that someone will accept it.

The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it as is the case for commodity money. To maintain value, the supply of Bitcoins is limited to 21 million. This is why Bitcoin continuously varies widely against government-issued currencies, such as the United States dollar. For this reason, Bitcoin, or any other type of money ETC with a strictly limited supply, will not be useful as money.

Lastly, fiat money also avoids unanticipated and uncontrollable fluctuations in the value of commodity money, which can wreck havoc on the economy, that result from market shocks of the commodity. Governments issue fiat currencies, which are in return regulated by the central bank. Fiat money is deemed legal tender in that it is often the official means of finalizing transactions. Gold in particular has, for long periods of our history, been the standard of value by which international debts have been settled. Most of the limitations of fiat currencies are imposed by law or by businesses, which can easily be changed. For instance, a US dollar or a euro can easily be subdivided into any number of smaller units if the government allowed it, and it is my prediction, that they will soon allow it.

  • Like commodity money, fiat money has value because it is determined to have value by the most concerned.
  • While the supply of cows is fairly limited, if they were used as money, you can bet ranchers would do their best to increase the supply of cows, which would decrease their value.
  • The colonial leaders declared independence and created a new currency called Continentals to finance their side of the war.

In this case, the government issues fiat money, such as the U.S. government. The bottom line is commodity money functions by establishing a value backed by a physical product that everyone assumes has a value, such as gold, silver, or tobacco. The author of “The Bitcoin Standard”, Dr. Safidean Ammous describes the reason behind Bitcoin being the next-gen money and the hidden charges of fiat currency on the stage of Bitcoin 2022. He also explains how the currency has been utilized to persecute ordinary citizens for centuries. Labeling it as “government-enabled,” he further highlighted the corruption embedded in most fiat nations. GreenbacksGreenback refers to the first paper money issued by the United States government in the 19th century to finance the expenses of the American Civil War.

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