Commodity 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. 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.
American Eagles are imprinted with their gold content and legal tender
face value.
Fiat 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. 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). 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. By contrast, commodity money that has been lost or destroyed cannot be recovered.
Demurrage Coinage , engraved
menorah, from the
Hasmoneon kingdom 37-40 BCE 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. Thus the overall ratios of the three coinages remained roughly equivalent.
Paper , 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. 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. 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,
cheques,
savings accounts,
transactional accounts, loaning,
trusts,
exchange rates, the transfer of credit and
debt, and
banking institutions for loans and
deposits. Commercial bank money is created by commercial banks whose
reserves (held as cash and other highly liquid assets) typically constitute only a fraction of their
deposits, while the banks maintain an obligation to redeem all these deposits upon demand - a practise known as
fractional-reserve banking. 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
money multiplier theory presents the process of creating commercial bank money as a multiple (greater than 1) of the amount of
base money created by the country's
central bank, the multiple itself being a function of the
legal regulation of banks imposed by financial regulators (e.g., potential
reserve requirements) beside the business policies of
commercial banks and the preferences of
households - factors which the central bank can influence, but not control completely. Contemporary central banks generally do not control the creation of money, nor do they try to, though their interest rate-setting monetary policies naturally affect the amount of loans and deposits that commercial banks create.
Digital or electronic accepting Bitcoin 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. In 2012, by number of transaction, 20 to 58 percent of transactions were electronic (dependent on country). Anonymous digital currencies were developed in the early 2000s. Early examples include
Ecash,
bit gold,
RPOW, and
b-money. In 2008,
Bitcoin introduced the concept of a decentralised, borderless currency that requires no
trusted third party. Instead, it relies on a distributed network of
nodes running
open-source software to enforce the system’s rules and reach
consensus, allowing it to operate without permission from banks or governments. == Monetary policy ==