Commodity money vs. Fiat money, what's the difference? - FreeEconHelp.com, Learning Economics... Solved!

3/6/12

Commodity money vs. Fiat money, what's the difference?

This quick post goes over a question recently asked about the difference between commodity and fiat money.

Basically:

Commodity money has another value or use, such as gold/jewelry/shells or possibly metal coins.

Fiat money is worthless without a guarantee from a government (notice on US currency it says people MUST accept this for all debts).


Commodity money derives its value from the the commodity out of which the good/money is made from.  So if a gold coin was made, the value of the coin would be its value in terms of gold rather than the face value of the coin.  Commodity money developed as a more convenient form of trade because it is superior to barter. However, commodity money is prone to huge fluctuations in price.

Imagine the commodity chosen was gold, and a new gold deposit is found.  Those who held lots of gold (think modern day banks) will lose a lot of their wealth.  Also, if food (such as dried beans) are used, what happens during a drought or a famine?  All the money is used for consumption so trade becomes more difficult.

In modern days, some prisons or jails use cigarettes or alcohol as a form of commodity money.  Without an official legal tender, people have to choose something that is common, stores its value, and is convenient.  Cigarettes are light, easy to conceal, and can last for years (best smoked within a month though).

Fiat money was first introduced as a more convenient form of money.  Instead of having to carry around gold/silver/cigarettes we could carry paper backed by the government.  Over time governments have been less willing to back up their fiat currency with gold or other commodities so fiat money has essentially become faith based in your government who issues it.  Most governments require that their currency be accepted to pay debts.

In my travels, I have experienced a few countries who have refused to take their local currency because I was a foreigner.  In Egypt, I tried to pay for my visa and hotel with local currency and was refused a visa until I paid in Euros, and received a discount for paying the hotel bill in American Dollars.  In Laos I received a discount for paying for goods in Thai Baht instead of Laos Kip.  Finally, in Slovakia I was able to pay for all of my purchases in Euros even though this apparently was not allowed by the government.

You can see from these anecdotes that faith drives the value of Fiat currency, and as soon as faith is lost, other forms of money are desired, whether it be Gold/Dollars or bullets.



13 comments:

  1. There is not much difference between these two. Category of commodity money is bit large. Commodity tips

    ReplyDelete

  2. Great topics share through this post and really this is very nice post so many thanks to all
    sebi registered advisory in india
    sebi registered company in india

    ReplyDelete
  3. This comment has been removed by a blog administrator.

    ReplyDelete
  4. fiat money is based on debt. we have faith in the banks that are robbing us

    ReplyDelete
  5. This best community for communication for stock market and exchange the ideas and knowledge of stock trading. you want to invest in stocks? The first rule is to invest in what you know, but it’s actually not that simple. We should have proper tips of stock market. For best ideas and tips get from here.....
    MCX Tips Provider in India.

    ReplyDelete
  6. Such a nice post given by you.Thank you for sharing information related to commodity market.I have gain much knowledge about commodity market.Waiting for the bullion tips like this.

    ReplyDelete
  7. I simply wanted to thank you a lot more for your amazing website you have developed here. It can be full of useful tips for those who are actually interested in this specific subject, primarily this very post. Forex

    ReplyDelete
  8. Great article thanks for sharing such a useful information in it. I have suggestion for new investment planner and trader safe your investment with wealth research financial services. They have best researcher team and they providing 90% exact share market level. You see the level and you decide how to invest in share market.
    STOCK FUTURE TIPS
    STOCK OPTION TIPS

    ReplyDelete
  9. Great article sir thanks for sharing this kind or information. In this service, MCX Tips we provide 3-4 calls in a day of mcx tips including base metals and precious metals. MCX tips package includes calls in all base and precious metals traded in MCX tips like Gold tips, Silver tips, Copper tips, Nickel tips, Lead, Zinc & Aluminum tips. MCX tips are the best way to make the profit in share market.

    ReplyDelete
  10. Great info! I recently came across your blog and have been reading along. I thought I would leave my first comment. I don’t know what to say except that I have  Make money online

    ReplyDelete
  11. You don't need to have money, but what you do need is a solid business plan that spells out what the money will be used for. Don't be afraid of the term, Business Plan. https://www.bookkeepingspace.com

    ReplyDelete
  12. Pretty good post. I just stumbled upon your blog and wanted to say that I have really enjoyed reading your blog posts. Any way I’ll be subscribing to your feed and I hope you post again soon. penny stocks

    ReplyDelete
  13. If I ask you how to save money? Either you would be confused or overflowed with hundreds of money saving ideas. online payday advances utah

    ReplyDelete