Money refers to the source or medium of exchange that can be used to fulfil one’s daily needs. Money is an essential part of every person’s life, as without money, we can afford anything. Therefore, money has been divided majorly into three types accordingly. But here, we will be distinguishing between fiat money and commodity money. People tend to get confused between the types of money, but one should be clear and specific about the money as they represent its usage and differences.
Key Takeaways
- Fiat money has no intrinsic value and relies on government regulation, while commodity money has value based on the material it’s made from.
- Commodity money is backed by a physical commodity, such as gold or silver, whereas the trust in the issuing government backs fiat money.
- Fiat money is easier to manage and control for governments, while commodity money is subject to fluctuations in the value of the underlying commodity.
Fiat Money vs Commodity Money
Fiat money is a type of currency that is not backed by a physical commodity and has no intrinsic value and whose value is derived from the government’s decree. Commodity money is a type of currency that has intrinsic value because it is made of a physical asset that is valuable in its own right.
Fiat money refers to the money that the government of the respective countries issue, and also, the value of each currency is decided by them themselves. The value of the currency is decided by each country’s respective head bank. The currency is legal and can be issued only by the government and no other party. Also, the value of each currency depends upon the country. Example of fiat money includes the Indian rupee, US dollars, British pound, etc. Therefore, fiat money is manufactured in the form of paper.
On the other hand, Commodity Money refers to the money associated with the product’s value from where it is made and can be used as a medium of exchange. Initially, commodity money is extracted in the form of raw materials, and further, they are designed into the outcome for its usage. Also, its value keeps fluctuating. Example of commodity money includes gold, silver, copper, tea, salt, alcohol, etc. Gold or silver can be redesigned into jewellery.
Comparison Table
| Parameters of Comparison | Fiat Money | Commodity Money |
|---|---|---|
| Definition | The money that is issued and has the full power of the government for its creation and further used as a medium of exchange is known as fiat money. | The money that is not issued according to the government and has its respective value and is used as a medium of exchange is known as commodity money. |
| Nature | Fiat money is easily accessible and accepted easily in various ways. | Commodity money is accepted in some specific places and it can not be used everywhere. |
| Government Responsibility | The government issues and decided the value of the fiat money. | The government does not issue the commodity money and the value of the money. |
| Example | Major examples of fiat money are currencies and they are Indian rupees, US dollar, British pound, etc. | Major examples of commodity money are things like gold, silver, copper, tea, etc. |
| Quantity Determination | Generally, the Governmental Monetary Policy and the Monetary Policy together determine the quantity of the fiat money. | Generally, the market determines the quantity of the commodity money. |
| Value | Generally, fiat money has a fixed value. | Generally, commodity money’s value keeps fluctuating. |
| Advantages | Some advantages of fiat money are like it only uses the paper as the only natural resource for manufacturing the notes, it is stable, its supply is unlimited by the government, etc. | Some advantages of commodity money are like the raw form of the commodity can be redesigned into commodity money, the government never controls the commodity money, etc. |
| Disadvantages | Some disadvantages of fiat money include things such as the misuse of the bamboo trees for manufacturing paper, no stability of manufacturing sometimes, it also leads to hyperinflation, also has high transaction fees, etc. | Some disadvantages of commodity money include things such as its value keeps fluctuating, it does not possess stability, it also has high risks associated with itself as the value can decrease and can make a great change, etc. |
What is Fiat Money?
Money that is easily accepted and convenient to carry anywhere and everywhere is known as fiat money. It is convenient to carry because it has comparatively low-risk factors or takes less space to carry. In simple words, the currency is termed to be fiat money. And it depends upon each country for the usage and accessibility of their respective fiat money. The government of each country is responsible for the system of manufacturing fiat money. The government is also responsible for the value of fiat money, which is decided based on various factors affecting the fiat money in each country.
Examples of fiat money are currencies, which are the Indian rupee, the US dollar, the British pound, etc. And therefore, the value differs from each currency. Generally, the Governmental Monetary Policy and the Monetary Policy together determine the quantity of the fiat money. Fiat money also has an alternate name known as fiat currency.
Generally, fiat money has a fixed value, but sometimes or we can rarely say, the value fluctuates. The fluctuation of the value of fiat money depends upon the factors such as government policy or the country’s economy. Fiat money also has several advantages and disadvantages. Some advantages of fiat money are like it only uses paper as the only natural resource for manufacturing the notes, it is stable, its supply is unlimited by the government, etc. Whereas the disadvantages of fiat money include the misuse of bamboo trees for manufacturing paper, no stability of manufacturing sometimes, it also leads to hyperinflation, high transaction fees, etc.
What is Commodity Money?
Commodity money is the final product from a natural resource that is considered a type of money and has value in itself. Commodity money includes things like gold, silver, copper, tea, etc. And we know that things like gold, silver, copper, etc., are extracted from the earth and, after polishing it into a finished product, it is sold in the market. But, here comes the major limitation of commodity money: they are not easily accepted or accessible everywhere. We can find commodity money for selling and purchasing in some specific places. The government does not issue commodity money, but it is one of the wealth of the country’s economy.
The value of commodity money is also not decided by the government, and its value also keeps fluctuating for various reasons. The value of commodity money is solely dependent upon the market and determines the quantity of the money.
Some advantages of commodity money are like the raw form of the commodity can be redesigned into commodity money, the government never controls the commodity money, etc. Some disadvantages of commodity money include things such as its value keep fluctuating, it does not possess stability, and it also has high risks associated with itself as the value can decrease and can make a great change, etc. In commodity money, nature is exploited at a very high level.
Main Differences Between Fiat Money and Commodity Money
- The money that is issued and has the full power of the government for its creation and further used as a medium of exchange is known as fiat money. On the other hand, money that is not issued according to the government and has its respective value and is used as a medium of exchange is known as commodity money.
- Fiat money is easily accessible and accepted easily in various ways. On the other hand, Commodity money is accepted in some specific places, and it can not be used everywhere.
- The government issues and decides the value of the fiat money. On the other hand, the government does not issue commodity money and the value of the money.
- Examples of fiat money are currencies, which are the Indian rupee, the US dollar, the British pound, etc. On the other hand, major examples of commodity money are things like gold, silver, copper, tea, etc.
- Generally, the Governmental Monetary Policy and the Monetary Policy together determine the quantity of the fiat money. On the other hand, generally, the market determines the quantity of the commodity money.
- Generally, fiat money has a fixed value. On the other hand, generally, commodity money’s value keeps fluctuating.
- Some advantages of fiat money are like it only uses paper as the only natural resource for manufacturing the notes, it is stable, its supply is unlimited by the government, etc. On the other hand, some advantages of commodity money are like the raw form of the commodity can be redesigned into commodity money, the government never controls the commodity money, etc.
- Some disadvantages of fiat money include the misuse of bamboo trees for manufacturing paper, the stability of manufacturing sometimes, and it also leads to hyperinflation, high transaction fees, etc. On the other hand, some disadvantages of commodity money include things such as its value keep fluctuating, it does not possess stability, and it also has high risks associated with itself as the value can decrease and can make a great change, etc.
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