Commodity Money vs Fiat Money

There has been numerous stories about exchanges of goods as a form of money in different circumstances . Like there were Cigarettes used in WWII by the prisoner of War camps, beads used by north american Indians , cattle in south Africa, and small green scraps of paper in north america. Now there are various kinds of money that are divided into two groups : Commodity money and Fiat Money

Commodity Money

There are certain products that can not only be used as money but can also be utilized for other purposes. The above example of cigarette and cattle that were exchanged as medium of exchange (money in their case) has also an alternative use (You can smoke a cigarette). Another valid example is of GOLD that was used as money in old times and had a great value of its own by being utilized in other resources like in jewelry or dental filling or gold plated products etc.

Commodity money are items that have their own intrinsic values and can also be used for some other use.

Fiat Money

Fiat money is also called Token money that are intrinsically worthless. They have no value of their own. For example what value does some green pieces of paper have if they are not used as Money – medium of exchange to buy products and services. In fact, dollar bills are no longer backed by any commodity at all – silver, gold or anything else. They are not just exchangeable for dimes, nickles dollars and so on…

Fiat money are Items that are used as a medium of exchange (money) but does not have its own intrinsic value.

So individuals all over the world accept these pieces of paper as money because their governments make sure it is accepted as a means of payments and store of value. It means that paper money has the legal tender to be accepted as that medium of exchange and in settlement of loans, debts etc. Thus, it is this fiat money that is properly printed by every central bank of a country and used by its citizens.

Apart from the responsibility of printing the money- the government of each country makes sure that it does not print that much money that it loses it value. In other words, too much supply of money in the economy will make it lose it value. Which means you can buy the same things on the sam price that you bought before. Thus, inflation devalues money.

The issue of devaluation of money is called currency debasement.