There are four types of money accepted by the economists of today.
- Fiat money is the currency issued by governments
- Commodity Money – A good with an agreed value
- Fiduciary Money – money which derives its value from trusts or promises of payment
- Commercial bank money is credit and loans in the banking system.
What is fiat currency?
Fiat money is currency that does not have a backing in the form of a physical commodity. Instead, it is backed up by the strength and stability of the body issuing the money. The value of fiat money is determined by the market’s supply and demand. This fluctuates according to the perception of the health or economy.
Most governments use fiat currency systems. It allows them to develop economic policies and influence the money supply alongside the central bank.
Fiat money is the foundation of most modern monetary systems, and that’s why the terms “currencies” and “money” are used interchangeably. The value of most other systems is derived from comparisons with fiat money. For help with your money, try Stroud Accountants like www.randall-payne.co.uk/services/accountancy/stroud-accountants/
What is commodity currency?
This is a physical commodity that has intrinsic value. This system is often associated with bartering where there isn’t a standard practice.
The term commodity money is often used to describe precious metals such as Gold which historically supported most global currencies. In some societies, coffee and grains have been used as well.
What is fiduciary currency?
Fiduciary money is a form of money that is usually a written declaration of debt or intention of payment. It is basically a promise to pay money at a future date that is backed only by trust between two parties.
A fiduciary system of exchange is not without risk, since the money supply and the promises may not be in line. If too many people using fiduciary currency try to convert their statements all at once, this can cause a run on fiat money, which underpins exchanges.
What is commercial bank currency?
The commercial bank money is the loan money generated by financial institutions. When a depositor deposits money in a bank, the funds are then loaned to other customers. This earns interest for the depositor.
Reserve requirements are always present. This is the amount of money that a customer cannot be lent to another. Commercial bank money plays a crucial role in any financial system as it provides liquidity to buy and sell other assets. Banks lend money to consumers as mortgages, personal loans, and business loans.