Forms of Money

 

• There are 5 known types of money.


• Historically, most money was Commodity or Representative.


• In the 21st century, most money is Fiat money.


• Crypto currency and CBDC are new forms of money.

     5 minute read

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Commodity Money

US $10 Gold Coin
American Rare Coin

Commodity Money is made from a substance with intrinsic value, like gold or silver coins. The first monies were commodity money. But over time as economies became more sophisticated, it became very difficult to transport large amounts of commodity money, like gold.

The United States minted gold and silver coins from 1792 thru 1964, when it stopped minting silver dimes and quarters. Silver in silver dollars and half dollars was reduced to 40% composition until 1970, which signaled the end of commodity money in the United States. Silver coins disappeared from circulation soon afterward.

Representative Money

The next step in the evolution of money was redeemable Representative Money, where a certificate (note or bill) would be issued that represented, or was backed by gold or silver in a vault somewhere. The understanding was that the certificate could be redeemed for that gold or silver at any time.

1906-1922 Gold Certificate

The United States issued Silver Certificates, redeemable in silver dollars, until 1964. From 1964 thru 1968, silver certificates could be redeemed in silver "granules". On 24 June 1968, the redeeming of silver certificates ceased and the United States no longer had redeemable money.

 

1934D Silver Certificate

There is also non redeemable Representative Money, where notes are issued that are "backed" by gold or silver, but are not redeemable. It can be argued that the United States dollar was non redeemable representative money from 1934 thru 1973. Craig K. Elwell in his paper, a Brief History of the Gold Standard in the United States, refers to this period as a Quasi-Gold Standard.

Fiat Money

Investopedia defines Fiat Money as "a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it."

Fiat Money is also legal tender, which means that it must accepted as payment in commerce, unless otherwise stipulated. Legal tender is acceptable for payment of debts, and taxes must be paid in it.

Since 1973, the US Dollar has been entirely fiat money.

Crypto Currency

I am NOT ca$h

Crypto Currency is a new form of money, created in 2009. The first crypto currency was Bitcoin , which I will use as the epitomized example for all crypto currency.

Bitcoin exists only as numbers in a computers. There is no cash form of Bitcoin. A tally of who owns what, and of transactions, is kept in the computers the global internet community. The system of organization of these global computers use is a new technology called blockchain.

Central Bank Digital Currencies

Central Bank Digital Currencies (CBDC) are digital tokens, similar to cryptocurrency, issued by a central bank. At this time, both the United States Federal Reserve and the Bank of England are exploring issuing CBDC digital money.

The basic idea of CBDC currency is that it would be true digital cash. The term "digital cash" is sometimes used to describe the money transferred when using credit or debit cards. But this "plastic money" is not really digital cash. Credit or Debit cards provide authorizations to have money transferred from your bank account to another bank account.

True digital cash would be just like cash in your pocket, except that it would be in your digital wallet. In theory, digital cash from your digital wallet could be spent without any commercial bank involvement. A possible means to do this would be for your smartphone to contain your digital wallet.

How this could be done without it being hacked, or without commercial bank involvement, is a big question. There are currently a lot of unanswered questions about CBDC currency.

Why Crypto Currency

With fiat money, the government can simply declare that people cannot take money out of the country, or even out of their bank. The government can freeze bank accounts. You might be able to leave a country, but not with your money, at least not in check or electronic form.

If your money was in your possession as cash, you could convert that cash into diamonds or gold. But hiding significant amounts of physical money is difficult. As of today, the median price of a house in the United States is $375,000. That would be 3750 C-notes ($100 bills) or 12.02 lbs of gold.

Getting past security looking for excess amounts of money would be difficult enough, but with cash or gold you are also vulnerable to theft. If the government didn't you want to have your money, it isn't going to concern itself with its theft.

Bitcoin potentially solves these problems by allowing ultimate freedom of movement. Your Bitcoin money exists in your digital wallet, which is kept track of in the global blockchain. Access to your digital wallet is via your password, which could be kept in your head. So wherever you end up, you just need to convert your Bitcoin to spendable currency, which may be Bitcoin itself.

Bitcoin, at least in theory, cannot be stolen by nature of the blockchain.

However, China has outlawed crypto currency. Other countries may follow suit, which is major blow to freedom of movement with your money, and to crypto currencies in general.

Up to this point, Bitcoin has been more of speculative investment than a money. It has a history of being somewhat volatile:

Bitcoin Value over Last 5 Years

Because it is so volatile, Bitcoin is not a good store of value, thus not really good at being money itself. Yet, for many people in desperate situations, it may be their best option.