Types of Money The functions of money as a medium of exchange and a measure of value greatly facilitate the exchange of goods and services and the specialization of production. Without the use of money, trade would be reduced to barter, or the direct exchange of one commodity for another. This was the means of exchange used in primitive societies, and bartering is still practiced in some parts of the world today. In a barter economy, a person having something to trade must find another who wants it and has something acceptable to offer in exchange. In a money economy, the owner of a commodity may sell it for money, which is acceptable in payment for a wide range of other goods or services, thus avoiding the time and effort that would be required to find someone who could make an acceptable trade. Money may thus be regarded as a keystone of modern economic life. The most important types of money are commodity money, credit money, and fiat money. The value of commodity money is about equal to the value of the material contained in it. The principal materials used for this type of money have been gold, silver, and copper. In ancient times, various articles made of these metals, as well as of iron and bronze, were used as money, while among primitive societies commodities such as shells, beads, elephant tusks, furs, skins, and livestock served as mediums of exchange. The gold coins that circulated in the United States before 1933 were examples of commodity money because the value of the gold contained in the coin was about equal to the value of the coin. Credit money is paper backed by promises by the issuer, whether a government or a bank, to pay an equivalent value in the standard monetary metal, such as gold or silver. Paper money that is not redeemable in any other type of money and the value of which is fixed merely by government edict is known as fiat money. This is the type of money found today in the United States in the form of both coins and dollar bills. Credit money becomes fiat money when the issuing government suspends the convertibility of credit money into precious metal. Most fiat money began as credit money, such as the U.S. note known as the greenback which was issued during the American Civil War. Most minor coins in circulation are also a form of fiat money, because the value of the material of which they are made is usually less than their value as money. For example, the amount of nickel in a nickel coin today is less than its value as money. Both the fiat and credit forms of money are generally made acceptable through a government decree that all creditors must take the money in settlement of debts; the money is then referred to as legal tender. If the supply of paper money is not excessive in relation to the needs of trade and industry and people feel confident that this situation will continue, the currency is likely to be generally acceptable and to be relatively stable in value. If, however, such currency is issued in excessively large volume in order to finance government needs, confidence is destroyed and it rapidly loses value. Such depreciation of the currency is often followed by formal devaluation, or reduction of the official value of the currency, by governmental decree. The basic money of a country into which other forms of money may be converted and which determines the value of other kinds of money is called the money of redemption or standard money.A. [■]Modern standards have been either commodity standards, in which either gold or silver has been chiefly used as standard money, or fiat standards, consisting of inconvertible currency paper units.B. [■]Most monetary systems of the world at the present time, including those in China and the United States, are fiat systems. C. [■]They do not allow free convertibility of the currency into a metallic standard, and money is given value by government fiat or edict rather than by its nominal gold or silver content. D. [■]Modern systems are also described as managed currencies, because the value of the currency depends to a considerable extent on government management and policies. Internally, the monetary systems of China and the United States contain many elements of managed currency; although gold coinage is no longer permitted, gold may be owned, traded, or used for industrial purposes.
The functions of money as a medium of exchange and a measure of value greatly facilitate the exchange of goods and services and the specialization of production. Without the use of money, trade would be reduced to barter, or the direct exchange of one commodity for another. This was the means of exchange used in primitive societies, and bartering is still practiced in some parts of the world today. In a barter economy, a person having something to trade must find another who wants it and has something acceptable to offer in exchange. In a money economy, the owner of a commodity may sell it for money, which is acceptable in payment for a wide range of other goods or services, thus avoiding the time and effort that would be required to find someone who could make an acceptable trade. Money may thus be regarded as a keystone of modern economic life.
The most important types of money are commodity money, credit money, and fiat money. The value of commodity money is about equal to the value of the material contained in it. The principal materials used for this type of money have been gold, silver, and copper. In ancient times, various articles made of these metals, as well as of iron and bronze, were used as money, while among primitive societies commodities such as shells, beads, elephant tusks, furs, skins, and livestock served as mediums of exchange. The gold coins that circulated in the United States before 1933 were examples of commodity money because the value of the gold contained in the coin was about equal to the value of the coin.
Credit money is paper backed by promises by the issuer, whether a government or a bank, to pay an equivalent value in the standard monetary metal, such as gold or silver. Paper money that is not redeemable in any other type of money and the value of which is fixed merely by government edict is known as fiat money. This is the type of money found today in the United States in the form of both coins and dollar bills.
Credit money becomes fiat money when the issuing government suspends the convertibility of credit money into precious metal. Most fiat money began as credit money, such as the U.S. note known as the greenback which was issued during the American Civil War. Most minor coins in circulation are also a form of fiat money, because the value of the material of which they are made is usually less than their value as money. For example, the amount of nickel in a nickel coin today is less than its value as money.
Both the fiat and credit forms of money are generally made acceptable through a government decree that all creditors must take the money in settlement of debts; the money is then referred to as legal tender. If the supply of paper money is not excessive in relation to the needs of trade and industry and people feel confident that this situation will continue, the currency is likely to be generally acceptable and to be relatively stable in value. If, however, such currency is issued in excessively large volume in order to finance government needs, confidence is destroyed and it rapidly loses value. Such depreciation of the currency is often followed by formal devaluation, or reduction of the official value of the currency, by governmental decree.
The basic money of a country into which other forms of money may be converted and which determines the value of other kinds of money is called the money of redemption or standard money.A. [■]Modern standards have been either commodity standards, in which either gold or silver has been chiefly used as standard money, or fiat standards, consisting of inconvertible currency paper units.B. [■]Most monetary systems of the world at the present time, including those in China and the United States, are fiat systems. C. [■]They do not allow free convertibility of the currency into a metallic standard, and money is given value by government fiat or edict rather than by its nominal gold or silver content. D. [■]Modern systems are also described as managed currencies, because the value of the currency depends to a considerable extent on government management and policies. Internally, the monetary systems of China and the United States contain many elements of managed currency; although gold coinage is no longer permitted, gold may be owned, traded, or used for industrial purposes.
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