Is fiat money more prone to inflation than commodity money?


For example, it took about 133 times as many “Saddam” dinars as “Swiss” dinars to buy a man’s suit in Iraq at the time. The new notes, sometimes called “Bremer” dinars, were printed in Britain and elsewhere and flown into Iraq on 22 flights using Boeing 747s and other large aircraft. In both the northern and southern parts of Iraq, citizens turned in their old dinars for the new ones, suggesting at least more confidence at that moment in the “Bremer” dinar than in either the “Saddam” or “Swiss” dinars.

Representative money is a certificate or token that can be exchanged for the underlying commodity. For example, instead of carrying the gold commodity money with you, the gold might have been kept in a bank vault and you might carry a paper certificate that represents-or was “backed”-by the gold in the vault. It was understood that the certificate could be redeemed for gold at any time. Also, the certificate was easier and safer to carry than the actual gold.

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Certainly, the government can abuse the printing of money, but the government can abuse many things, such as can be seen perpetually in Russia. Only the people can ensure that the government works for their best interest. But an efficient economy requires money that not only serves as a convenient unit of exchange, but also as an accurate unit of account and as a predictable store of value. So, Ron Paul’s desire to end the Fed and go back to the gold standard will never happen.

Paper money is not commodity money because it has relatively little actual worth on its own. Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire. He has written publications for FEE, the Mises Institute, and many others. The creation of units of measurements such as ounces and pounds paved the way for such.

Monetarist theory suggests that inflation is alternatively the reduction in the purchasing power of a unit of currency in an economy. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.


However, the system had a selection of profound flaws in that it accommodated a very limited variety of trades. When products like bread and cows had to be exchanged, it became hard to calculate the trade, making it unpractical. The concept of money solved this problem and consequently expanded the trade industry tremendously. Part of the trust in commodity money also comes from its rarity, or at least how people perceive its rarity. Commodities such as gold are naturally rare, and it is because of this rareness that makes it more valuable and increases its intrinsic value.

Types of Money

The money supply cannot increase past the worth of commodity the country holds. Representative, fiat, and credit monies are more efficient than commodity money because they are superior media of exchange and units of account. Their quality is more uniform and easily ascertained, they have low weight-to-value ratios, they are more divisible and their divisibility is more flexible, and their supply is more elastic. Second, people are willing to sell something for money, even if they have no immediate need to purchase something else, because money serves as a store of value.

What are examples of commodity money?

Some examples include:AlcoholCocoa BeansCopperGoldSaltSea ShellsSilverTeaTobacco

Those who have studied example of commodity money or monetary history may have come across the concept. Commodity money in the time of high inflation can be used as a buffer as commodities have a value of their own, which currencies do not have. Commodity money has intrinsic value because it has other uses besides being a medium of exchange. Fiat money serves only as a medium of exchange, because its use as such is authorized by the government; it has no intrinsic value.

Usually, the example of commodity money‘s face value will be more than the actual costs of the component metals. In a few rare situations, the combination of inflation devaluing currency and metal prices rising, a coin may be worth more as a metal than a unit of currency. If this persists, the government may decide to withdraw that unit of currency from circulation. Some forms of commodity money may only fulfill the money role in very specific circumstances. Perhaps the best known example is the use of cigarettes as currency in prisons.


That would be an uncertain affair; you could not know when you headed for the store which items the grocer might agree to trade. Indeed, the complexity—and cost—of a visit to a grocery store in a barter economy would be so great that there probably would not be any grocery stores! If a future CBDC is not backed by an underlying commodity of real value then why should people trust it any more than fiat bank notes?

In fact, there is no good reason to hold such notes unless one believes (“buys into”) the dubious Marxist rhetoric that often accompanies them. Most of the limitations of fiat currencies are imposed by law or by businesses, which can easily be changed. For instance, a US dollar or a euro can easily be subdivided into any number of smaller units if the government allowed it, and it is my prediction, BNB that they will soon allow it. Some cryptocurrency enthusiasts argue that crypto-transactions will be cheaper. The problem here has to do with the establishment of businesses and oligopolies that process fiat currencies.

Although most of these people purchase only a small fraction of a Bitcoin, the demand created by many people around the world trying out Bitcoin may lead to a big demand overall, causing its price to increase. Almost all major economies have central banks that regulate the supply of money. A central bank can increase or decrease the money supply according to the needs of the economy. If there is too little money for the economy, then the money becomes more valuable, so people hoard it, thereby contracting the economy. This is the primary disadvantage with any type of currency in limited supply, be it gold or cryptocurrency. The second type of money is fiat money, which does not require backing by a physical commodity.

Definition of Commodity Money

As indicated above, the earliest example of commodities being used as money dates right back to our hunter-gatherer days when skins & furs were used for trade purposes in order to obtain all manner of other available items. The table below shows all the transactions that Bank A has had to help us keep track of them. For example, a check of a thousand dollars you receive from the company you work in will still retain value even if you cash it out a month later. Commodity money has been used throughout history and is even used today in certain circumstances.

BoC’s inflation fight faces a new hurdle: getting businesses’ pricing … – The Globe and Mail

BoC’s inflation fight faces a new hurdle: getting businesses’ pricing ….

Posted: Fri, 03 Mar 2023 23:45:04 GMT [source]

In a barter economy, an exchange between two people requires a double coincidence of wants, which means that what one person wants to buy is exactly what the other person wants to sell. Ultimately, the usefulness of money rests in exchanging it for goods and services. This concept of money is intentionally flexible, because money has taken a wide variety of forms in different cultures.

Money is any item or medium of exchange that is accepted by people for the payment of goods and services, as well as the repayment of loans. Economies rely on money to facilitate transactions and to power financial growth. Typically, it is economists who define money, where it comes from, and what it’s worth. Commodity-backed money is a slight variation on commodity money. While commodity money uses the commodity itself as currency directly, commodity-backed money is money that can be exchanged on demand for a specific commodity.

  • A central bank or other monetary authority must decide how much to circulate at any given time.
  • Most recently, in 2000, Ecuador and El Salvador adopted dollarization as a policy.
  • So if someone went to market with a pound of tobacco and nobody would accept it, they would be able to smoke it instead.
  • Its origin traces back to ancient days when people stopped relying on the bartering system to conduct trades.
  • This prevents you from creating more money than you have commodities to back it up with.

In fact, I would need to find a of wants-the unlikely case that two people each have something that the other wants at the right time and place to make an exchange. In other words, I would need to GAL find a mechanic who would be willing to exchange car repairs for a private bassoon concert by 9 AM tomorrow so I can drive to my next orchestra rehearsal. In an economy where people have very specialized skills, this kind of exchange would take an incredible amount of time and effort; in fact, it might be nearly impossible. Money reduces the cost of this transaction because, while it might be very difficult to find a mechanic who would exchange car repairs for bassoon concerts, it is not hard to find one who would exchange car repairs for money. In fact, without money, every transaction would require me to find producers who would exchange their goods and services for bassoon performances.

Today, the face value of specie and base-metal coins is set by government fiat, and it is only this value which must be legally accepted as payment for debt, in the jurisdiction of the government which declares the coin to be legal tender. 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. To summarize, no cryptocurrency could ever be practical as money if it does not have a stable value, but if its value is stable, then no one would buy it because there would be no reason to get a cryptocurrency with no fiat value.

In the 17th and early 18th centuries, for example, American colonists used beaver pelts and dried corn in transactions. Simply put, commodity-backed money is money that is supported by something tangible that has an intrinsic value. You may also hear references to a commodity-backed currency, but this is essentially the same concept as commodity-backed money. Due to its various disadvantages like its non-divisibility and the difficulty in assessing the value of articles it purchases, commodity money is very difficult to use daily. Fiat money, on the other hand, due to its ease of use and multiple denominations, is very popular. Fiat money and Commodity money are in complete contrast with each other.

Most types of cash used today do not have any real intrinsic value. For example, a banknote is virtually worthless in itself and only has value because society accepts it as a measure of currency and a unit of exchange. The main difference between commodity and fiat money is that commodity money has an intrinsic value. In other words, it has a use and value outside of its use as money. For example, gold can can be used in jewellery as well as a money. By contrast, fiat money only has value that is guaranteed by government.

In order to appreciate the conveniences that money brings to an economy, think about life without it. Imagine I am a musician-a bassoonist in an orchestra-who has a car that needs to be repaired. In a world without money, I would need to barter for car repair.

Examples of commodity money include precious metals, foodstuffs, and even cigarettes. 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.