Types of Money

As we have hinted, different societies have quite different money systems. The major historical types of money are Commodity moneys These are moneys that have value in non-monetary uses equivalent to the monetary value of the commodity. Any commodity used as a medium of exchange is commodity money. Well-known examples are gold, copper and silver metals, but sea-shells (that is, cowrie shells) tobacco, and cigarettes have all been used. Historically, copper, gold and silver coins have been the most used in European and East Asian societies. metallic coin An example could be gold and silver coins that have values roughly equal to the price the metal would command as jewelry. other commodities As we have seen, seashells have been used as money, as have tobacco and, perhaps, oxen. Fiat money Fiat money is a monetary standard (usually paper money) that people are required by law to accept as a medium of exchange and/or a standard of deferred payment. It is money by the "fiat" -- the command -- of the sovereign. Fiduciary money Whenever a bank issues credible promises to pay in some other form of money, and the promises are transferable, they can circulate as money. Bank money is also called "fiduciary money," since it is based on the trust people have that the bank will keep faith (fides) and pay as promised. Fiduciary money may be based on promises to pay in commodity money (gold coin, for example) or in fiat money. We will go into much more detail later, because modern monetary systems are largely fiduciary. Two major instances of fiduciary money are bank notes These are bills issued by banks. They were widely used in the nineteenth century and are still used in some countries. checking accounts In our society, checks are acceptable as money, so by the definition of money -- a commodity or token that serves as a medium of exchange -- checks are money, just as real as any other kind of money. Both fiat money and fiduciary money are tokens, of course, as distinct from commodity moneys. These token moneys are much the most important kinds of money in the modern world.

Representative money
Representative money is money that consists of token coins, other physical tokens such as certificates, and even non-physical "digital certificates" (authenticated digital transactions) that can be reliably exchanged for a fixed quantity of a commodity such as gold, silver or potentially water, oil or food. Representative money thus stands in direct and fixed relation to the commodity which backs it, while not itself being composed of that commodity. The gold standard, based on paper notes that are normally freely convertible into fixed quantities of gold, is the most common form of representative money. It was adopted by most of the industrialized countries during the 18th and 19th centuries.