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Commodity Money

For instance, gold has historically held significant value due to its rarity – which is seen as a status symbol of power and wealth. By contrast, however, fiat money derives its value through people’s trust in its value and willingness to accept it. To serve as a convenient means of payment, as an unit of account and as a store of value, the creation and destruction of money must be carefully controlled according to the needs of the economy. Present value and future value of investments is used extensively by investors to decide which investments are best and by businesses to decide which capital investments would yield the best returns. If I have 100 Bitcoins earning 5% annually, then, at the end of 1 year, I will have 105 Bitcoins. But how much those 105 Bitcoins will be worth 1 year from now is anybody’s guess. Cryptocurrency enthusiasts often argue that the main benefit of cryptocurrency is that it is independent of any government.

And while blockchains may be secure against undetectable alterations, governments can easily cut off access to blockchains. Governments can also pass laws requiring the organizations or people supporting the cryptocurrency infrastructure to require identification of all users of the cryptocurrency. Blockchains located outside of the country can be blocked within the country. The need to collect taxes requires that the government know people’s income and spending; otherwise, governments cannot survive. While anarchists may laud that, modern civilization cannot exist without government. This situation is largely what led Franklin D. Roosevelt to sever the convertibility of U.S. currency and debt into gold during the Great Depression. Under the gold standard , hoarding gold had a direct impact on monetary flow, hurting commerce and exacerbating recessions. By severing the link between gold reserves and currency, the Federal Reserve is better able to combat major economic shocks to the economy. You can see it in the early ’80s oil crisis and recession and the most recent financial crisis, when gold prices soared, only to fall sharply once the overall economic environment improved. With the exception of the late 1970s’ and early 1980s’ oil crisis and recession, inflation has become much less volatile, and deflation hasn’t been an issue.

Representative Money

Whilst the US dollar has been around for centuries, it only recently became a fiat money. President Nixon subsequently cut these ties in August 1971, in what was to become known as the ‘Nixon Shock’. The Euro is controlled by the European Central Bank and is the official currency of 19 countries within the European Union. We can consider the Euro as fiat money because it is not exchangeable for anything other than the value of goods. In other words, it has no value other than its use as a medium of exchange. Whilst much of its value is granted by the government, fiat money would be worthless if consumers do not trust it. For instance, a number of African governments such as Zimbabwe have been known to print an excessive amount of money, thereby creating hyperinflation. The economy is flooded with new money, thereby deflating its true value. What this does is erode people’s trust in the government’s ability to maintain its value. Being able to create and destroy money is required to stabilize the value of that money, because supply and demand for money continually fluctuates.

commodity money vs fiat money

A key feature of commodity money is that the value is directly perceived by its users, who recognize the utility or beauty of the tokens as goods in themselves. Since payment by commodity generally provides a useful good, commodity money is similar to barter, but is distinguishable from it in having a single recognized unit of exchange. Radford described the establishment of commodity money in P.O.W camps. Commodity money is money whose value comes from a commodity of which it is made. Where fiat currency can be printed commodity money vs fiat money as much as governments want, aggregates can’t be magically produced, and so they should hold value even as currencies lose their value due to aggregates’ limited supply. Fiat currencies rose to prominence in the early 20th century as governments sought to insulate our economies from the booms and busts of the economic cycles. By allowing the central banks to control the printing of money, it allowed countries to avoid society crushing depressions like the ones experienced in the early 1920s, or so the theory believes.

Characteristics Of Fiat Money

U.S. President Richard Nixon introduced a law that canceled, the direct convertibility of the U.S. dollar into gold. Currently, most nations use paper-based fiat currencies that only serve as a mode of payment. Adding to this, there is greater opportunity for bubbles with fiat currency – an economic cycle in which there is a rapid increase in price before an equally rapid decline in price. The first country to use fiat currency, was China around 1000 AD, and as recently as 1971, when Richard Nixon took the U.S. off the gold standard.

Commodity money systems also automatically adjust to structural changes in the economy. If it suddenly became easier to find clamshells, say, twenty in an hour, everybody would harvest clamshells until the clamshell prices of arrows, bows, and rabbits doubled, restoring equilibrium. If clamshell production dropped to five an hour, prices would also drop by half because no one would harvest clamshells when they could earn twice as many clamshells in an hour producing arrows, bows, or rabbits. If clamshell production remained steady but it became easier to produce bows, the only thing that would change would be the price of bows relative to the prices of arrows and rabbits, and not the price level, or all prices. For example, if it was possible to produce bows in 1.5 hours instead of 2, the price of bows would drop to 15 clamshells . It looks to me as though the source of Greeley’s error might be his apparently running-together how a would-be monetary instrument is legally or conventionally deemed monetary, with how that instrument is legally or conventionally issued. The ‘fiat’ moniker generally pertains to , while the ‘credit’ moniker generally pertains to .

All Money Is fiat Money, Most Money Is credit Money

Even though most people could use cash, most people choose to use credit cards and bank transfers because they are convenient, and they work well. Although the issuance of paper money in the United States began in 1690, the U.S. government did not issue paper currency with the intent that it circulate as money until 1861, when Congress approved the issuance of demand Treasury notes. Most of the U.S. currency circulating today is in the form of Federal Reserve notes with the green Treasury seal. This approach differs from money whose value is underpinned by some physical good such as gold or silver, called commodity money. The United States, for example, used a gold standard for most of the late 19th and early 20th century. A person could exchange U.S. currency — as well as many public and even some private debts — for gold as late as 1971. The value of the precious metal in the coin may give it another value, but this varies over time. The value of the metal is subject to bilateral agreement, just as is the case with pure metals or commodities which had not been monetized by any government. Countries are specifically exempted in U.S. law from being legal tender for the payment of debts in the United States, so that a seller who refuses to accept them cannot be sued by the payer who offers them to settle a debt. However, nothing prevents such arrangements from being made if both parties agree on a value for the coins.

Are coins commodity or fiat money?

Because these items weren’t always easy to carry and could go bad after a while, we eventually changed to using coins, made of precious metals. These coins were still considered a commodity system because the value of the metals used to make the coins were equal to the value of the coins.

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