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. 
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