Types of Money | Commodity, Representative, Fiat, and Bank | Money Instructor

Money Instructor

20 Mar 202203:32

Summary

TLDRThis script explores the concept of money, distinguishing between two main types: commodity money, which has intrinsic value like precious metals, and fiat money, which is government-authorized and lacks intrinsic value. It also touches on representative money, a precursor to fiat, and bank money, which includes checkable deposits. The script highlights the importance of acceptance in defining money and the potential issues with inflation and fluctuation in commodity money.

Takeaways

💼 Money is a medium of exchange used for the transfer of goods or services and can take many forms.
🏵️ Commodity money has intrinsic value, such as precious metals like gold and silver, and serves as both a medium of exchange and a store of value.
🔍 The value of commodity money can fluctuate unpredictably, affecting its reliability as a stable currency.
🌐 Early forms of money in the United States included gold, which led to inflation after significant gold discoveries.
🐎 Lower quality commodities could drive higher quality ones out of circulation due to the variability in commodity money's value.
📜 Representative money is a token or certificate exchangeable for the underlying commodity, like gold, and was a precursor to modern currency.
💼 Fiat money is the current form of currency used in modern economies, authorized by governments and not necessarily having intrinsic value.
📈 Fiat money's value is based on government decree and public trust rather than the material it's made from.
🏦 Bank money refers to the credit banks offer to depositors and is used for transactions without the need for physical currency.
📊 Acceptance is the key factor that makes something money; even fiat money is accepted as long as it maintains public trust and isn't over-issued.
🔎 If too much money is printed, leading to rapid devaluation, people may seek alternative forms of currency.

Q & A

What is the definition of money according to the script?
-Money is any good that is used widely and accepted in transactions involving the transfer of goods or services.
What are the two main categories of money mentioned in the script?
-The two main categories of money are money with intrinsic value and money without intrinsic value.
What is commodity money and what are some examples?
-Commodity money is money with intrinsic value, such as precious metals like gold and silver, which have the same value as the money they represent due to their intrinsic worth.
Why was the value of commodity money considered to fluctuate unpredictably?
-The value of commodity money can fluctuate unpredictably because it is tied to the market value of the underlying commodity, which can change over time.
What was one of the drawbacks of using commodity money like gold in the United States?
-One drawback was that gold discoveries, such as those in California, led to an increase in the quantity of money, resulting in severe bouts of inflation.
What is representative money and how does it differ from commodity money?
-Representative money is a token or certificate that can be exchanged for the underlying commodity, like gold. It differs from commodity money in that it is a substitute for carrying the actual commodity, making it more convenient to use.
Why did people start to trust paper certificates more than gold over time?
-People started to trust paper certificates more than gold because they were easier to carry and use in transactions, and they were backed by the gold stored in vaults.
What is fiat money and how does it differ from representative money?
-Fiat money is money that an authority, usually a government, has authorized to be used as a means of exchange without necessarily having intrinsic value. It differs from representative money in that it does not have to be backed by a commodity.
What is bank money and how is it used in transactions?
-Bank money is the amount of book credit banks offer to depositors. It is used to make transactions using forms of money with no intrinsic value, such as checkable deposits and travelers checks, which serve as a means of exchanging money.
Why is acceptance the main factor that makes something money?
-Acceptance is the main factor because even fiat money issued by the government is accepted as long as it is trusted and not printed excessively, which maintains its value and utility in transactions.
What happens when too much money is printed by the government?
-When too much money is printed, it can lead to a decrease in the value of the currency due to inflation, and people may start searching for alternative forms of money.

Outlines

00:00

💰 Introduction to Money Types

This paragraph introduces the concept of money, explaining it as any widely accepted good used in transactions for goods or services. It distinguishes between two main categories of money: commodity money, which has intrinsic value (e.g., precious metals like gold and silver), and money without intrinsic value. The paragraph also touches on the historical use of commodity money in Greece and the United States, highlighting the issue of value fluctuation and the problem of 'Gresham's Law,' where lower quality commodities can drive higher quality ones out of circulation. Additionally, it introduces the concept of representative money, which acts as a token or certificate exchangeable for the underlying commodity, like gold.

📜 The Evolution of Money: From Representative to Fiat

This section delves into the evolution of money, starting with representative money, which was backed by physical commodities like gold but was more portable and convenient than the commodities themselves. It then discusses the transition to fiat money, which is currently used in modern economies and does not have intrinsic value. Fiat money's value is derived from government authorization and public trust. The paragraph also explains bank money, which is the credit offered by banks to depositors and used for transactions through checkable deposits and similar instruments. The importance of acceptance in defining what constitutes money is emphasized, noting that even fiat money is accepted because of its widespread recognition and use.

Mindmap

Keywords

💡Money

Money is defined as any good that is widely accepted in transactions for the transfer of goods or services. It is central to the video's theme as it discusses different forms and types of money. The script mentions that money can be in various forms, emphasizing its role in facilitating economic transactions.

💡Intrinsic Value

Intrinsic value refers to the inherent worth of an item, independent of its use as money. The video discusses 'commodity money,' which has intrinsic value, such as precious metals like gold and silver. The concept is integral as it differentiates commodity money from other forms that derive their value from external systems or authorities.

💡Commodity Money

Commodity money is money that has intrinsic value and is used as a medium of exchange. The script uses gold and silver as examples, highlighting that their value remains even outside of their monetary use. This concept is key to understanding the evolution of money from tangible commodities to more abstract forms.

💡Representative Money

Representative money is a type of money that represents a claim on an underlying commodity, like gold. The script explains that instead of carrying actual gold, people used paper certificates backed by vaulted gold. This concept shows the transition from physical commodities to more portable and symbolic representations of value.

💡Fiat Money

Fiat money is money that is declared by a government to be legal tender but is not backed by a physical commodity. The script mentions that fiat money's value is derived from the trust and acceptance of the government and its citizens. It is the focus of the video's discussion on modern economies and how money is accepted without intrinsic value.

💡Legal Tender

Legal tender is money that is recognized by law to settle debts. The script refers to the phrase 'this note is legal tender for all debts public and private,' which is printed on fiat currency bills. This term is crucial in understanding the enforceability of fiat money in settling financial obligations.

💡Bank Money

Bank money represents the credit that banks offer to their depositors, such as checkable deposits and travelers checks. The script explains that bank money is used for transactions and can be converted into currency. It illustrates an advanced form of money that operates without physical presence, relying on the banking system's credibility.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of money is falling. The script mentions the increase in money supply after gold discoveries in California, leading to severe inflation. This concept is vital for understanding the economic implications of changes in the money supply.

💡Gresham's Law

Gresham's Law states that 'bad money drives out good.' The script refers to this economic principle in the context of loan repayments, where lower quality horses were used to pay back loans stated in terms of higher quality horses. This concept is important for understanding the dynamics of commodity money and its quality.

💡Acceptance

Acceptance is the willingness of parties to recognize and use a particular form of money in transactions. The script emphasizes that acceptance is what makes something money, whether it has intrinsic value or not. It is a fundamental concept in the video's exploration of the nature and function of money.

💡Debit Card

A debit card is a payment card that links directly to a bank account and allows the cardholder to make electronic transactions. The script mentions debit cards as a form of bank money, illustrating how modern financial instruments facilitate the exchange of value without the need for physical currency.

Highlights

Money is defined as any good widely accepted in transactions for the transfer of goods or services.

There are two main categories of money: with intrinsic value and without intrinsic value.

Commodity money, such as precious metals, has the same value as the money it represents due to its intrinsic worth.

Commodity money serves as both a medium for exchange and a storehouse of purchasing power.

Greece had some of the earliest gold and silver coins, representing an early form of commodity money.

Commodity money's value can fluctuate unpredictably, affecting its reliability as a currency.

In the U.S., gold discoveries led to an increase in money supply and severe inflation.

Variability in commodity money can lead to 'Gresham's Law,' where lower quality commodities drive higher quality ones from circulation.

Representative money is a token or certificate exchangeable for the underlying commodity, such as gold.

Paper certificates backed by vaulted gold were trusted as much as, or more than, the gold itself.

Fiat money, used in modern economies, does not necessarily have intrinsic value and is authorized by a governing authority.

Fiat money's value is derived from its acceptance as a means of exchange, rather than material worth.

Bank money refers to the credit banks offer to depositors and is used for transactions without intrinsic value.

Bank money includes checkable deposits and travelers checks, serving as a means of exchanging money.

Acceptance is the key factor that makes something money; fiat money is accepted as long as it is not over-issued.

Over-issuance of money can lead people to seek alternative forms of currency.