Why did we stop using commodity money?
Over time the value of the money was eventually loosed from the value of coins. You could no longer trade the paper for a set amount of metal coins In fact, in some countries you could no longer exchange paper for coins at all. Once this change occurred the money was no longer "backed" by any type of commodity.
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.
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.
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.
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.
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.
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.
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.
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 money has been used throughout history as a medium of economic exchange. Commodity money is money that has intrinsic value, meaning that it has value even if it is not used as money. Examples of commodity money include precious metals, foodstuffs, and even cigarettes.
What is the U.S. dollar 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.
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.
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.
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.
US dollar (USD)
It is the number one most traded currency globally, accounting for a daily average volume of US$2.9 trillion.
This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led U.S. President Richard Nixon to end international convertibility of the U.S. dollar to gold on August 15, 1971 (the "Nixon Shock").
Unlike gold, Fiat money is not backed by a commodity, meaning it's not limited or scarce. For this reason, a government has greater control over the currency supply, which can give it the power to manage economic variables such as interest rates, liquidity and credit supply.
Gold is definitely a commodity, but it can be used in some similar ways to a currency. To understand how gold can be technically considered a currency, it is important to first define 'currency' and 'commodity'.
Examples of commodities that have been used as media of exchange include gold, silver, copper, salt, peppercorns, tea, jewellery (watches, spectacles, etc.)
Paper money has perceived monetary advantages over gold-backed assets. Specifically, as it gives good economic control to the government. It could help in taming inflation and provide enough supply of cash to the market. Moreover, fiat money is easier to distribute and use in daily transactions.
Why is money called fiat?
The word “fiat” is Latin in origin and refers to an arbitrary order issued by a government or other authoritative figure. When applied to paper money, fiat currency refers to the scary notion that our dollar has value only because the government says it does.
Gold coins are the best example of commodity money. Commodity money is an asset that is backed by a specific commodity. The commodity is deemed to have an intrinsic value and is not backed by the government decree. Gold coins are commodity money as they are backed by a precious metal, gold, which has a high value.
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.
Currently, the gold standard isn't used as the monetary system for any nation. The last country to abandon it was Switzerland, which severed ties between its currency and gold in 1999. Not coincidentally, Switzerland has the seventh largest gold reserve of all countries.
No, the U.S. dollar is used to settle oil sales because of its wide global acceptance. That acceptance makes it easier for oil exporters to invest the export proceeds.
