Does commodity money qualify as money?
Early forms of money were often commodity money-money that had value because it was made of a substance that had value. Examples of commodity money are gold and silver coins.
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.
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.
Answer and Explanation:
Commodity money is an item that can be used as money, because it has value, but it also can stand alone, such as gold. Representative money is usually a paper form currency meaning it is backed by a commodity, such as gold or silver, in a bank or storage facility. The paper itself has no value.
For a system to function as a medium of exchange, it must represent a standard of value. Further, all parties to the transaction must accept that standard. In modern economies, the medium of exchange is currency. Gold has served as a medium of exchange throughout history.
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.
Most countries, such as the United States, issue fiat money or fiat currency. It is not based on the value of a commodity, such as silver or gold; rather, the value is based on the trust the citizens have in the country issuing it. The printed money does not have any value on its own.
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.
a commodity's value changes over time. Commodity money is known to have volatility risk. Its value is affected by supply and demand. For instance, if oil is used as money, its value will increase significantly when there is a natural event that disrupts its supply.
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.
What is commodity money also known as?
Commodity money is also know as standard money because it is the monetary unit which is approved by the government to act as the legal tender in the currency system and in which other types of money in the economy like bank draft, promissory not etc. is convertible.
Fiat money is a currency that lacks intrinsic value and is established as a legal tender by government regulation. Traditionally, currencies were backed by physical commodities such as silver and gold, but fiat money is based on the creditworthiness of the issuing government.
Thus, money value of a paper note is what is written on it, i.e. Rs 100, Rs 500, etc. You can buy goods and services worth of that amount in the market. Commodity value of money refers to value of the material out of which coins or currency notes are made.
The primary advantage of commodity money is that commodities tend to have greater intrinsic value. Further, because of this intrinsic value, commodity money is not as susceptible to inflation as fiat money is. Finally, commodity money may be less susceptible to government regulation.
In order that it represent objectified and socially necessary labour-time, Marx's money must be a commodity. Marx's explanation of money, his development of exchange-value in the series 'product (activity)—commodity—money' appears as a simple dialectic of concepts.
US dollar (USD)
It is the number one most traded currency globally, accounting for a daily average volume of US$2.9 trillion.
| Pros | Cons |
|---|---|
| Can generate short-term profits | Extreme volatility |
| A hedge against inflation | Long periods of declining prices |
| Diversification benefits | Holding physical commodities may incur storage fees |
| Commodities don't generate income for investors |
Commodity currencies are most prevalent in developing countries (eg. Burundi, Tanzania, Papua New Guinea). In the foreign exchange market, commodity currencies generally refer to the New Zealand dollar, Norwegian krone, South African rand, Brazilian real, Russian ruble and the Chilean peso.
While commodity money has some advantages over fiat money, such as protection against inflation, it also has some disadvantages, such as the difficulty of transporting and storing physical commodities.
If the U.S. dollar collapses, the cost of imports will become more expensive, the government will not be able to borrow at current rates, resulting in a deficit that will need to be filled by increasing taxes or printing money, inflation will skyrocket due to the higher cost of imports and the printing of money, ...
What is the US currency backed by?
Prior to 1971, the US dollar was backed by gold. Today, the dollar is backed by 2 things: the government's ability to generate revenues (via debt or taxes), and its authority to compel economic participants to transact in dollars.
Why are U.S. Dollars considered money? By law, they must be accepted as a means of payment.
Why Is Fiat Money Valuable? In contrast to commodity-based money, such as gold coins or paper bills redeemable for precious metals, fiat money is backed entirely by the full faith and trust in the government that issued it.
Inflation: One of the most well-known disadvantages of fiat money is the potential for inflation. Because fiat currency isn't linked to any valuable commodity, it can be produced in unlimited quantities, especially if a government is facing budget deficits or high levels of debt.
Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. Is Bitcoin a commodity? Yes, virtual currencies, such as Bitcoin, have been determined to be commodities under the Commodity Exchange Act (CEA).
