What is a commodity backed money?
Commodity-backed money is money that can be exchanged for a specific commodity on demand. It has no intrinsic value but derives its value from the commodities that have value like gold or silver. Fiat money is government-backed currency. The US dollar is backed by the full faith and credit of the U.S. government.
Commodity-backed money is a type of currency guaranteed by a physical commodity, such as gold or silver. There are several types of commodity-backed money, including, gold standard, silver standard, bi-metalic standard and commodity reserve currency.
Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods.
Commodity money is a good used as a medium of exchange that has other uses. A commodity-backed money is a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods.
Commodity money has some intrinsic value due to the content of precious metal it is made up of or backed by, but debasem*nt or increases in precious metal supply can cause inflation. Fiat money is backed only by the faith of the government and its ability to levy taxes.
Historically, examples of commodity money include gold, silver, tea, alcohol, and seashells. Even if no one would accept such goods as trade, the owners could still use them for their purposes.
Examples of commodity money are gold and silver coins. Gold coins were valuable because they could be used in exchange for other goods or services, but also because the gold itself was valued and had other uses.
Therefore, commodity money has its intrinsic value. In contrast, commodity-backed money does not have any intrinsic value except that an individual possessing it can exchange it for a precious item such as gold.
As commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a unit of account. Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or other commodities held at a bank.
What are Commodities? Commodities are raw materials used to create the products consumers buy, from food to furniture to gasoline or petrol. Commodities include agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver and aluminum.
Why is commodity-backed money better than commodity money?
More efficient commodity-backed money
The commodity-backed money does not use commodities such as gold and silver as money. Instead, it uses the value of such commodities for transactions. Therefore, the commodity-backed money system uses resources more efficiently than the system of commodity money.
A brief look at how money has evolved over time from being printed on valuable substances (commodity money), to merely representing those valuable substances (commodity-backed money), to not representing anything at all (fiat money).
Commodity-backed money uses resources more efficiently than simple commodity money, like gold and silver coins, because commodity-backed money ties up fewer valuable resources.
Gold coins are the best example of commodity money. Commodity money is an asset that is backed by a specific commodity.
gold and silver coins. "Objects that have value in themselves and that are also used as money" is the definition for.. commodity money.
Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U.S. dollar, are fiat currencies.
One of the major problems with commodity money was quality. Individuals tended to use or sell their best products while their poorest products would be offered as commodity money. Additionally, even good quality commodities would deteriorate if retained too long.
Commodity Money: The first forms of money were commodity money. That means the money itself had value. Wheat, cowrie shells, livestock or gold have all been forms of commodity money. Historically, precious metals have been the most common form of commodity money.
The gold standard is a monetary system in which the value of a country's currency is directly linked to gold. With the gold standard, countries agree to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a price for gold, and it buys and sells gold at that price.
Fiat money is backed by a country's government rather than by a physical commodity or financial instrument. Most coin and paper currencies that are used throughout the world are fiat money. This includes the U.S. dollar, the British pound, the Indian rupee, and the euro.
Why is fiat currency better than gold?
Paper money has perceived monetary advantages over gold-backed assets. Specifically, as it gives good economic control to the government. It could help in taming inflation and provide enough supply of cash to the market. Moreover, fiat money is easier to distribute and use in daily transactions.
Commodity money has been used throughout history as a medium of economic exchange. Commodity money is money that has intrinsic value, meaning that it has value even if it is not used as money. Examples of commodity money include precious metals, foodstuffs, and even cigarettes.
Today, U.S. bills are backed by the Federal Reserve, but as fiat money. As economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved toward the use of fiat money. Fiat money is legal tender whose value is backed by the government that issued it.
However, commodity money also has its disadvantages. One disadvantage is that the value of the commodity can be volatile, which can lead to fluctuations in the value of the currency. Another disadvantage is that it can be difficult to transport and store, especially in large quantities.
Money is anything that serves as a medium of exchange. Other functions of money are to serve as a unit of account and as a store of value. Money may or may not have intrinsic value. Commodity money has intrinsic value because it has other uses besides being a medium of exchange.
