What is money? Economists differentiate among several different types. Learn about the four main types of money including commodity money, representative money, fiat money, and bank money. Also learn why intrinsic value is important for understanding the types of money.
Use this video lesson on the topic to discuss the basic economic concepts of
- Types of Money
- Intrinsic Value
- Printing Money and Inflation
Hand out the worksheet below (see the GET LESSON button near the bottom of the page).
Show students the video and have and have them complete the worksheet. Then have a discussion about the various types of money. Discuss why we categorize money by intrinsic value. Review the questions on the worksheet.
Types of Money
Money is any good that is used widely, and accepted in transactions involving the transfer of goods or services. Money can come in many forms but there are two main categories of money: money with intrinsic value, or money without intrinsic value.
Money with intrinsic value is called commodity money. Commodity money has the same value as the money it represents. Examples are precious metals like gold, silver, or other valuable commodities. The value is what the commodity is worth, even if it is not used as money. Because of its intrinsic worth, it is not only a medium for exchange, but also a storehouse of purchasing power. Greece had some of the first gold and silver coins in use.
Commodity money has one drawback: its value can fluctuate in an unpredictable way. In the United States, gold was an early form of money. The quantity of money went up after gold discoveries in California and elsewhere which led to some of the nation’s most severe bouts of inflation.
However, the quality of commodity money can be a problem. Because of this variability, lower-quality commodities can drive higher-quality commodities from circulation. For example, horses were once used as money. Loan obligations were often stated in terms of the number of horses that had to be repaid. Due to such obligations, it was common for loans to be paid back with lower-quality horses.
Representative money can be described as a token or certificate that can be exchanged for the underlying commodity. Instead of carrying the gold currency money, you might keep a paper certificate or certificate that was backed by the vaulted gold. The certificate could be exchanged for gold at any moment. It was also easier to carry than actual gold and people grew to trust paper certificates as much or more than gold over time.
Representative money was replaced by fiat money, which is the type that is used today in modern economies. Money does not necessarily have to have intrinsic value. Fiat money refers to money that an authority, usually a government, has authorized to be used as a means of exchange. Fiat money refers to a good whose value is lower than its money value and It has no other value than its use as money. For example, dollar bills are a type of Fiat money whose value as slips made of printed paper are worth less than their money value.
The phrase “This note is legal tender for all debts, public and private.” is printed on each bill. We accept the value of the currency because it is accepted by the government and others who value it enough to pay it.
Bank money is the amount of book credit banks offer to depositors. Bank money is used to make transactions using forms of money with no intrinsic value such as checkable deposits and traveler’s checks. You can pay for something by using a check or a debit card. Although they can be converted into currency, they mainly serve only as a means of exchanging money.
Altogether, acceptance is the main thing that makes something money. Even Fiat money, issued by the government, is accepted as long as it isn’t printed too fast. People will search for alternative money if too much money is printed.