1 Analysis‎ > ‎Economics‎ > ‎02 Modern Money‎ > ‎

1 Classes of Money

A class of thing that may be used as;
  1. a medium of exchange,
  2. a unit of account and
  3. a store of value,
in a society is called a currency or money, and a society that trades using a given currency, will for convenience, be called an economy (which usually corresponds to a geographic or political region such as a country, but not always).
  • An offer of things in exchange for currency is an offer to sell.
  • A bid for things in exchange for currency is a bid to buy.
The four main types of money are commodity money, representative money, credit money and fiat money.

Commodity Money

A commodity, can be used as money if it can be used as a unit of value, a medium of exchange and a store of value. Many commodities have been used in this manner, such as cattle, grain, rice, salt, cowrie shells, tobacco, silver and gold.

Although one might expect commodity money to have its value firmly determined by the use value of the commodity, this is often not the case.

As soon as a commodity becomes money; its ability to be exchanged for anything may artificially increase its exchange value, and because it is a store of value, this encourages the storing of the commodity its self, removing a lot of useful commodity from the society, thus promoting the artificial value rise.

An ideal commodity currency would not change its value by virtue of becoming a currency but this is hard to achieve.

Representative Money

The inconvenience of transporting valuable commodities to use as currency lead to storing the valuable commodities and issuing promissory notes to redeem the commodity to the bearer on demand.

Representative money has been issues based on land, tobacco, silver and gold, amongst other things.

Credit Money

Any transferable claim against a trusted person or body for anything (that isn't a commodity) i.e. an amount of work, an IOU etc., has value and so may be given up in exchange for other things. Thus such a claim becomes money as it can be used as a unit of value, a medium of exchange and a store of value.

Fiat Money

Today's money in almost all economies is fiat currency or fiat money. Fiat money consists of coins and notes that have little intrinsic value and nor to they represent anything of intrinsic value as representative money does.

Fiat money's value results from a government's order in law (fiat) that it can be used in settlement of a debt and that it will be demanded as payment for taxes. Any court of the economy will consider a debt paid if paid in the fiat currency.

This gives the coins and notes of the fiat currency a general use value to the population subjected to the taxes, and so an exchange value amongst them, making it suitable as money.

One of the advantages of a fiat currency is that it does not require tying up of valuable commodities when the objective is to store value.

One of the disadvantages is that it can be printed at will leading to inflation.

The Value of Fiat Money

The value of a fiat currency depends partly on its use to pay tax, but in a healthy economy, mostly on the market in that currency. By this I mean the amount of things on offer for sale (in that currency), and the amount of money being bid for those things. This was looked at under Price with Time

Thus the value of the dollar is raised in that much of Chinese production can be paid for in dollars. (At the moment!)

(C)2010 Tom de Havas. The information under this section is my own work it may be reproduced without modification but must include this notice.