The Economic Problem: From Barter to Commodity Money to Electronic Money


This was because, for a commodity money., the supply was self-regulating. That is to say, farmers would produce large quantitates of tobacco, but the population would consume in equal size. Nevertheless, there was a fundamental issue in the fact that the supply would eventually outstrip the demand; meaning there was a large supply of tobacco and/or salt. We can define Commodity money as a physical good that consumers universally use to trade for other goods. In other words, it is like the money we use today, but has an actual value.

What is the difference between commodity money and fiat money?

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. So even if it wasn’t used as money, it has value. By contrast, fiat money only has value that is guaranteed by government. For instance, if the US government said it was no longer using the dollar, a 1 dollar bill would become worthless.

The ability to control those aspects of the money helped lessen the blow to both the U.S. and global economies. Currently, most developed nations use a form of fiat money as their mode of payment. For fiat currencies to be successful, the nations must control both counterfeiting and management of monetary supply.

The Functions of Money

•A “synthetic commodity” base money consists of something that lacks nonmonetary value, yet is absolutely scarce. Money is a medium of exchange that can be used to facilitate transactions for goods and services. The gold standard is a system in which a country’s government allows its currency to be freely converted into fixed amounts of gold.

perfectly liquid

In response to serious economic problems, the country’s central bank began to print money at a staggering pace. That resulted in hyperinflation, which ran between 231 million and 489 billion percent in 2008. Many governments no longer think commodity money is in the best interests of the public. After the Gulf War, the northern, mostly Kurdish area of Iraq was separated from the rest of Iraq though the enforcement of the no-fly-zone. Iraqi citizens in southern Iraq were given three weeks to exchange their old dinars for the new ones. In the northern part of Iraq, citizens could not exchange their notes and so they simply continued to use the old ones.

Fiat Currency and Inflation

Gasoline was 25¢ a gallon in the MATIC US in 1922, or 1.2% of an ounce of gold at contemporary prices; in 2019 it was $2.50, or 0.17% the price of an ounce of gold. By the 1700s, a new form of money began to emerge in Europe, spearheaded by the use of promissory notes, or notes of hand, among gentlemen. A gentleman’s note of hand was his promise to pay money, and was as good as money; case law in common law countries supports the notion that a note of hand is money.

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Fundamentally, this captured the true value of the trade since a jar of milk could be considered equal to a dozen eggs. 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.

Journal of Financial Stability

Gold is not money because it is not used as a medium of exchange. 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. “We don’t have a currency of our own,” proclaimed Nerchivan Barzani, the Kurdish regional government’s prime minister in a news interview in 2003. But, even without official recognition by the government, the so-called “Swiss” dinar certainly seemed to function as a fiat money.


Fiduciary money is a type of money that gets its value from both parties accepting it as a medium of exchange in a transaction. Whether fiduciary money is worth anything is decided by the anticipation that it will be widely recognized as a future means of trade. Another important concept to know is that fiat currency is legal tender. Being a legal tender means that it is recognized by law to be used as a payment method.

Paper statistics

Instead, it has value because the system as a whole is built on it. There is a demand for it since everyone agrees that it can be used as a means of exchange. Beyond this, the federal government plays a big role in maintaining this structure through taxes. United States citizens cannot pay their taxes in anything other than dollars. They cannot pay taxes with cows, sheep, or financial assets like stocks or derivatives.

commodity money. money is unique in the sense that it is WAVES the only form of money that has an underlying value. Even though we no longer use commodities such as gold as a form of money; it still has value as jewellery or gilding. Commodities often come into being in situations where other forms of money are not available or not trusted, and these are social norms. Various commodities were used in pre-Revolutionary America including wampum , maize , iron nails, beaver pelts, and tobacco. But for the immediate future, fiat currency is what we have to play with, and likely into our children’s future as well. The holder of commodity money has several advantages; we can use it or spend it.

Commodity Money

A money has to be rare in the fact that the supply is limited. Without such, money can become almost unlimited – thereby leading to massive levels of inflation. Nevertheless, the money supply has to still be able to react to increasing economic output.

Relations of reciprocity, and/or redistribution, substituted for market exchange. In metallic currencies, a government mint will coin money by placing a mark on metal tokens, typically gold or silver, which serves as a guarantee of their weight and purity. In issuing this coinage at a face value higher than its costs, the government gains a profit known as seigniorage. In another example, in US prisons after smoking was banned circa 2003, commodity money has switched in many places to containers of mackerel fish fillets, which have a fairly standard cost and are easy to store. These may be exchanged for many services in prisons where currency is prohibited.

What are the 3 types of money?

Economists differentiate among three different types of money: commodity money, fiat money, and bank money. Commodity money is a good whose value serves as the value of money. Gold coins are an example of commodity money. In most countries, commodity money has been replaced with fiat money.

The issue of paper money began much earlier in China, in the 11th century, and there was also regarded as money itself. Fiat money is issued and maintained by the government, whereas commodity money acquires its value from the material it is made of or its usefulness to the holder. Commodity money requires no recognition or approval from the government.