Fiat Money vs Commodity Money: A Breakdown of the Pros and Cons

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In contrast, the currency is a promissory note or coin presented in the form of money and is a tangible concept. Perishability – commodity monies can devalue over time, such as oil, barley, or olive oil. They have a shelf life, and once they extend past that shelf life, they devalue. Fiat money has no shelf life other than the degrading of real money used through the system. The holder of commodity money has several advantages; we can use it or spend it.

One may achieve a Pareto improvement by giving resources to the current old from the current young, who in turn receive resources, when they are old from the next young generation, ad infinitum. There are various ways to implement or interpret such a transfer scheme. Samuelson interpreted the scheme as fiat money, issued perhaps by the initially old generation. Others have interpreted it as government debt, to be rolled over forever, or as an unfunded pension system. The necessity claim implies that one route to a cashless economy is better and better monitoring.


So, for instance, if someone stood ready to exchange a stablecoin for a US dollar, then anybody who had stablecoins would quickly exchange them for the US dollar, since the US dollar has fiat value but the stablecoin does not. The main reason why Bitcoin is so popular today is because people are buying it hoping that they will be able to sell it for much higher price later on. Without that profit incentive, there would be no apparent reason for people to even buy stablecoins. Dollarization is the most extreme form of currency failure, when people lose all faith in their currency and adopt the currency of another country. Usually, United States currency is adopted because it is considered one of the safest currencies in the world, and because many United States immigrants send U.S. currency to their relatives abroad.

However, that would require a central authority who can control the supply of stablecoins while standing WAVES ready to exchange the stablecoins for a fiat currency. The problem with this proposed solution is that stablecoins do not have fiat value, so they have no real value; few people accept it as a means of payment. The problem with these solutions is that they are placing the cart before the horse. The fundamental problem with cryptocurrencies is the supply problem, which causes wild fluctuations in price. Although Bitcoin seems to be attracting more and more followers — even businesses are starting to dip their toes in the Bitcoin universe, it still cannot become a major currency without a stable value.

Which of the following best explains the difference between commodity money and fiat money? A….

We can understand the significance of a by considering its absence. Please note that the availability of the products and services on the App is subject to jurisdictional limitations. may not offer certain products, features and/or services on the App in certain jurisdictions due to potential or actual regulatory restrictions. Intrinsically valueless money used as money because of government decree. Some countries started to frequently devalue their currency or even cancel the peg to the US dollar.


To equate the marginal value of cash balances with the marginal social cost of creating additional fiat money, which is effectively zero. Steady deflation, not price stability, is therefore optimal, and the rate of deflation should equal the real rate of interest. Commodity money’s value is likewise not determined by the government, and it fluctuates for a variety of causes. Commodity money’s value is exclusively determined by the market, which also sets the money’s amount.

Federal Reserve has a dual mandate to keep the unemployment rate and inflation rate low. Commodity money has an intrinsic value, which means it has a perceived or true value attached to it. This type of currency is derived from a material that has value, such as gold or silver. Consider dollar bills — they’re all cut from the same paper, but their values can differ depending on what a government deems the currency is capable of being exchanged for. Fiat currency, or fiat money, is a type of currency that’s issued by the government and is not backed by physical commodities, such as gold.

What Is Fiat Money And Its Examples?

Fiat money is a government-validated currency not backed by any commodity but the issuing authority’s creditworthiness. Moreover, fiat money has no intrinsic value and is non-convertible and irredeemable. For example, the US dollar (USD), the Euro, the Japanese Yen, and the Chinese Yuan are fiat currencies.

Often nations would have dual , with paper trading at some discount to money which represented specie. Jacques de Meulles, the Intendant of Finance, conceived an ingenious ad hoc solution – the temporary issuance of paper money to pay the soldiers, in the form of playing cards. He confiscated all the playing cards in the colony, had them cut into pieces, wrote denominations on the pieces, signed them, and issued them to the soldiers as pay in lieu of gold and silver. Because of the chronic shortages of money of all types in the colonies, these cards were accepted readily by merchants and the public and circulated freely at face value.

For example, the Russian ruble and BNB Canadian fiat money vs commodity money are both strongly influenced by the price of oil. However, they are still considered fiat currencies because each individual ruble or dollar is not backed by a physical barrel of oil. It is highly illiquid but could eventually be converted to money. Gold is not money because it is not used as a medium of exchange.

The hundred dollar bill can buy goods or services worth only $100 because the government has put authority in the bill that whoever holds the paper currency is entitled to be given goods or services worth the bill’s face value. A fiat money is a type of currency that is declared legal tender by a government but has no intrinsic or fixed value and is not backed by any tangible asset, such as gold or silver. Fiat currency values are guaranteed by the government that issues the money, and the government can control the supply of money in circulation in response to economic fluctuations.

Explain how the Fed can achieve a federal funds rate target of 1.5% if the federal funds rate is currently at 2%. We’ve updated our privacy policy so that we are compliant with changing global privacy regulations and to provide you with insight into the limited ways in which we use your data. Fiat money is readily available and accepted in a variety of ways. Commodity money, on the other hand, is only accepted in a few places and cannot be used elsewhere. Commodity money is only accepted in certain locations and cannot be used everywhere.

  • He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
  • Ok, let’s dive in and learn more about fiat money versus commodity 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.

The commodity must be dividable into standardized quantities, so that different units of value can be created. It must be durable, so that it lasts; otherwise, it wouldn’t function well as a store of value, and it must be continually replaced. The best example of money that illustrates its properties is gold. Gold is universally accepted by most cultures as a means of payment because it is relatively scarce, and new supplies are difficult to find and mine. Being the most malleable and ductile of metals, it can also be easily cut into different sizes to correspond to specific values.

fiat money

Suppose you are holding one dollar, and one dollar can buy you an apple. If the government is printing out one more dollar, the total dollar supply in the market becomes two, and now you can only buy half an apple. Issuing new currency is considered a tax on holders of existing currency. Another factor that may cause a sharp decline in prices is the proliferation of other cryptocurrencies. Many people will either buy the much cheaper cryptocurrencies or sell Bitcoin to buy those currencies, hoping that cheaper cryptocurrencies will increase in price faster than Bitcoin. Finally, if inflation is too high, then people stop using it as a medium of exchange, and start using barter or the currency of another country or maybe even a cryptocurrency, such as Bitcoin.

The US Dollar, Euro, British Pound, and Chinese Yuan are all fiat currencies. Fiat money is currency that holds no intrinsic value, as it’s not backed by anything physical like silver or gold — but has value from the backing of the government that issued it. Just like other currencies, such as cryptocurrencies, there are some pros and cons to fiat money. Fiat money is a legal tender, which is a currency declared legal by the government, and its value is backed by the issuer .

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