Why was commodity money replaced by metallic money? (2024)

FAQs

Why was commodity money replaced by metallic money? ›

Commodities used as money couldn't be stored for long periods, and hence lost their values. Therefore, people switched to metallic money. Metallic money was used in place of commodity money as it was durable, hard, and transportable.

Over time, people stopped using valuable metals for coins due to the high cost of the metals. Instead, we shifted to using the paper and non-precious metal money system that we use today. In this money system, each coin and bill represents a value that everyone agrees upon.

Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U.S. dollar, are fiat currencies.

Any commodity chosen to serve as money is called commodity money. Precious metals or any other metal having high intrinsic value used as money are called metallic money.

Commodity money has intrinsic value but risks large price fluctuations based on changing commodity prices. If silver coins are used, for instance, a large discovery of silver may cause the value of the silver currency to plunge, resulting in inflation.

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.

With money, the problem of needing to find someone to barter with is eliminated, making it easier and more convenient for people to get the goods and services they want. Another important function money serves is acting as a common measure of value.

Metallic money refers to coins made of various metals such as gold, silver, bronze, nickel, and so on. Its worth is guaranteed by the state's exclusive monopoly.

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.

Fiat money became the norm after U.S. President Richard Nixon decided to abandon the gold standard in 1971. This meant that the U.S. dollar was no longer convertible into gold. 2 The number of dollars printed was no longer directly tied to the amount of gold the government stored.

Are dollar bills commodity money? ›

Commodity Money vs.

Fiat money's value derives from the issuing government's stability as well as supply and demand – not from a commodity's intrinsic worth. Most major modern global currencies, including the U.S. dollar and euro, are fiat currencies.

U.S. currency is fiat money. It is not a commodity with its own great value and it does not represent gold-or any other valuable commodity-held in a vault somewhere.

a) Representative Money: Representative money is that money which is fully backed by equal metallic reserve. The holder of a bank note can easily get it converted into metallic (gold & silver) form on demand. b) Convertible Money: It is the form of money which can be converted into gold, silver i.e. metallic reserves.

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.

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.

Commodity-backed money is a type of currency guaranteed by a physical commodity, such as gold or silver. There are several types of commodity-backed money, including, gold standard, silver standard, bi-metalic standard and commodity reserve currency.

U.S. currency is fiat money. It is not a commodity with its own great value and it does not represent gold-or any other valuable commodity-held in a vault somewhere. It is valued because it is legal tender and people have faith in its use as money.

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.

The use of barter-like methods using commodity money may date back to at least 100,000 years ago. Trading in red ochre is attested in Swaziland, shell jewellery in the form of strung beads also dates back to this period, and had the basic attributes needed of commodity money.

More efficient commodity-backed money

The commodity-backed money does not use commodities such as gold and silver as money. Instead, it uses the value of such commodities for transactions. Therefore, the commodity-backed money system uses resources more efficiently than the system of commodity money.