Before we get into the three types of money, we must first discuss the definition of money.
Money is defined as anything that is accepted as a medium of exchange for goods and services which also satisfies these two other functions
Store of Value
- Money refers to a substance that has consistent value
- Money does not go bad! That's why you can save it
Unit of Account
- Money can be used to measure value
- When something is listed as $4, money is being used as a unit of account
Taking these three functions into considerations, economists have defined that there are four different kinds of money in the world. These include:
Commodity Money 🥇
- Commodity money refers to objects which are exchanged for goods and services on the basis of their intrinsic value as determined by scarcity.
- Examples include gold coins, spices, etc.
Fiat Money 💰
- Fiat Money is money that gets its value from a government.
- The government declares fiat money to be legal tender and fines those who refuse to accept such money while they conduct open market transactions.
- Fiat money has little intrinsic value compared to its face value. Examples include the dollar, the yen, the rupee, etc.
Fiduciary Money 💸
- Fiduciary Money is money whose value depends on people’s confidence that it will generally be accepted as a form of payment.
- Fiduciary Money is not considered legal tender by the government and institutions are not required to accept such money.
- As a result, those who issue Fiduciary Money promise to exchange it for commodity/fiat money when given the chance.
- Examples include checks, banknotes, etc.
Commercial Bank Money 🤑
- Commercial Reserve Money is created by Fractional Reserve Banking.
- Fractional reserve banking refers to a process wherein banks give out loans worth more than the actual value of the currency they store in the bank(required reserves).
- Basically, Commercial bank money is money created by banks that can be exchanged for goods and services.