The Many Forms of Money

Commodity Money vs. Fiat Money
• Commodity Money—has a market value as a good that
equals its value as money (i.e. Gold)
• Convertible Paper Money—a piece of paper that could
be redeemed for specie (gold or silver) on demand.
• Fiat Money—government-backed money that we
currently use for payment.

Characteristics of Good Money
• Durable—so it can be exchanged many times without
wearing out.
• Portability—the amount of purchasing power required to
make common payments must be convenient to carry.
• Divisibility—cows can no longer be used as a medium
of exchange since it would be impossible to pay for items
costing less than one cow.
• Recognizability—it was difficult for people to distinguish
precious monetary metals from less valuable metals,
then other means, such as coinage, was found to make
gold and silver money more recognizable.

Characteristics of Good Money
• Milling—little grooves on the edges of American
quarters and dimes—to prevent clipping, which was the
shaving of slivers off the edges of full-bodied coins and
still passing them off as having full value..

Convertible Bank Notes as Alternative to
Coins
• Once paper money began to circulate widely, there was
less a need for individuals to withdraw their gold, and the
goldsmiths realized that they didn’t really need to keep
all of the gold on hand.
• Later goldsmiths became what we would today call a
commercial bank.
• The basic difference between checks and currency is
that checks are ordinarily retired after being spent only
once, whereas the currency continues to circulate until it
deteriorates physically.

Inconvertible Currencies
• Since 1971, the world has had a system of fiat money, in
which government-issued money is not backed by
anything of tangible value. Instead, dollars are now
backed by the trust that other individuals will accept
them in exchange.