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The Many Forms of Money

  1. The Many Forms of Money
  2. 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.
  3. 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.
  4. 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..
  5. 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.
  6. 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.