The Theory of Money and Credit - Commodity money

The importance of distinguishing among three types of money: commodity money, fiat money, and credit money. Modern monetary theory also distinguishes among different types of money, using a categorization system that focuses on the liquidity of money.

Commodity Money

Commodity money is any money whose value comes from the commodity out of which it is made. The commodity itself constitutes the money and the money is the commodity. Examples of commodities that have been used as exchange of mediums of include Gold, ready made cloths, Silver, copper, agricultural items ,salt, pepper, corns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, and candy. Since payment by commodity generally provides a useful good, commodity money is similar to barter but is distinct because commodity money uses a single recognized unit of exchange.

Commodity money

Commodity money is any money whose value comes from the commodity out of which it is made. The commodity itself constitutes the money and the money is the commodity. Examples of commodities that have been used as exchange of mediums of include Gold, ready made cloths, Silver, copper, agricultural items ,salt, pepper, corns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, and candy. Since payment by commodity generally provides a useful good, commodity money is similar to barter but is distinct because commodity money uses a single recognized unit of exchange.

Liquidity of Money

Liquidity describes how easily an item can be traded for another item, or into the common currency within an economy. Money is the most liquid asset because it is universally recognized and accepted as the common currency. In this way, money gives consumers the freedom to trade goods and services easily without having to barter.

Liquid financial instruments are tradable easily and have transaction costs are low. There should be no or minimal spread between the prices to buy and sell the instrument being used as money.

Cost of Money

National currencies are vitally important to the way modern economies operate. They allow us to consistently express the value of an item across borders of countries, oceans, and cultures. We need exchange rates because one nation's currency is not always accepted in another. You can't walk into a store in Japan and buy a loaf of bread with Swiss francs. First, you'd have to go to a bank and buy some Japanese yen with your Swiss francs. An exchange rate is simply the cost of one form of currency in another form of currency. In other words, if you exchange 1 Swiss franc for 80 Japanese yen, you really just purchased a different form of money.

History of Money

However, the use of proto-money may date back to at least 100,000 years ago, and the use of precious metals as money dates back at least 6000 years. The use of gold as money has been traced back to the fourth millennium B.C. when the Egyptians used gold bars of a set weight as a medium of exchange, as the Sumerians had done somewhat earlier with silver bars. Coins or at least minted tokens of a fixed value first appear in the 7th century BC in Greece. The first banknotes was used in China in the 7th century, and the first in Europe was issued by Stockholms Banco in 1661.