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Types of Money

We are all aware of paper money, metallic coins, checks and credit cards, but most of us don't understand what makes money a valuable commodity. We don't understand the governmenatal processes used to create monetary standards, and why money has to be backed by other valuable commodities.

The phrase "backing" is the relationship between different types of money and the commodities used for the money's redemption. This means that money is basically worthless unless there is something of equivalent value to honor it's worth and/or to replace it, if necessary.

The value of any type of money is determined by it's purchasing power or the amount of goods and services it can procure at any given time. Purchasing power and the liquidity of funds is what makes money useful in todays fast paced economy.

There are various types of money that include standard, commodity, fiat, credit and certain noncommodity standards.

  • Standard money, called "money of redemption," is the basic money of countries that is used for it's market value as a commodity that equals it's monetary value as bullion or coinage.
  • Commodity money is based on the value of commodities that is about equal to the value of materials used in it, such as gold, silver, and copper. At certain times in history, iron and bronze were used as commodity money, as well as shells, furs, beads, and domesticated animals.
  • Credit money is money that is issued by governments or banks that is backed by promises to be paid in equivalent value in standard monetary metals, such as gold, silver, or copper. Credit money usually has a greater face value than the market value of the metals that it is made of.
  • Fiat standards of money is based on a system that does not allow currency to be freely converted into a metallic standard and is based on an edit by the government that uses it. Today, most countries use this system of determining monetary value.
  • Noncommodity standards of money, may be used in times of war or other national emergencies when governments can not collect money from taxes or on imports. In such a case, governments simply print money to pay their debts. This money has no relations to normal standards of value, causes high inflation, and usually becomes unacceptable very quickly as a viable currency.

All coin and paper money issued by the United States government considered to be legal tender and is authorized to by law as money that can be used to pay debts and the purchase of goods and services.



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