Fiat Money Meaning, System, Examples, vs Commodity Money


Thus, if you present a MasterCard to a jeweler as payment for a $500 ring, the firm that issued you the card will lend you the $500 and send that money, less a service charge, to the jeweler. But a card that says you have such a relationship is not money, just as your debit card is not money. Houses, office buildings, land, works of art, and many other commodities serve as a means XLM of storing wealth and value.

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  • Business CycleThe business cycle refers to the alternating phases of economic growth and decline.
  • While it is true that all money in an economy serves three functions, not all money is created equal.

The first issue of playing card money occurred during June 1685 and was redeemed three months later. However, the shortages of coinage reoccurred and more issues of card money were made during subsequent years. Eventually, the Governor of New France acknowledged their useful role as a circulating medium of exchange. Washington Irving records an emergency use of paper money by the Spanish for a siege during the Conquest of Granada (1482–1492). In 1661, Johan Palmstruch issued the first regular paper money in the West, by royal charter XLM from the Kingdom of Sweden, through a new institution, the Bank of Stockholm. While this private paper currency was largely a failure, the Swedish parliament eventually assumed control of the issue of paper money in the country.

Main Differences Between Fiat Money and Commodity Money

Please note that an investment in crypto carries risks in addition to the opportunities described above. This article does not constitute investment advice, nor is it an offer or invitation to purchase any crypto assets. Fiat money is easily accessible and accepted easily in various ways. On the other hand, Commodity money is accepted in some specific places and it can not be used everywhere.


It receives payments in exchange for making items available to end-users. They constitute an integral part of the supply chain management for providing raw materials to manufacturers and finished goods to customers. 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.

Fiat currency definition

It also serves as a unit of account and as a store of value—as the “mack” did in Lompoc. On the other hand, generally, commodity money’s value keeps fluctuating. Generally, the Governmental Monetary Policy and the Monetary Policy together determine the quantity of the fiat money. On the other hand, generally, the market determines the quantity of the commodity money.

That means it has value in and of itself, with people trading it freely in the knowledge that someone will accept it. Money declared by a person, institution or government to be legal tender, meaning that it must be accepted in payment of a debt in specific circumstances. It is highly illiquid but could eventually be converted to money. Gold is not money because it is not used as a medium of exchange. Is a written order to a bank to transfer ownership of a checkable deposit.

Later, in 550 B.C., under the order of King Croesus of Lydia, it went into full circulation. Because all currency is not deposited and banks do hold excess reserves. The simple money multiplier is a representation of the maximum size of the money multiplier. In this lesson, you will learn the difference between cryptocurrencies and fiat money. Cryptocurrencies share many similarities with conventional fiat money, but also offer some interesting advantages.

Nevertheless, there was a fundamental issue in the fact that the difference between commodity money and fiat money would eventually outstrip the demand; meaning there was a large supply of tobacco and/or salt. As it was a form of money, this inevitably led to inflation. We can see, touch, and feel commodity money – it is physical.

For example, during World War II, prisoners were using cigarettes as commodity money, and they were exchanging them for other goods and services. A cigarette’s value was attached to a certain portion of bread. Even those who didn’t smoke were using cigarettes as a means to conduct trade.

This reduction in purchasing power is seen as a monetarist cause of inflation. While other theories and causes of inflation exist, the idea that changes to the money supply influence price levels has bearing on commodity vs. fiat monies. The tradition of this exchange can still be found on a Pound Sterling paper note – take a look at the writing on the front, which will say “I promise to pay the bearer on demand the sum of…”.

You also have M0, which is the difference between commodity money and fiat money base in an economy, which covers the entire currency that is either at the hands of the public or in bank reserves. The Federal Reserve uses monetary aggregates to measure the money supply in the economy. The views expressed on this blog are those of the bloggers, and not necessarily those of Intuit. Third-party blogger may have received compensation for their time and services.

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.