What are the different forms of money?

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Most people want to get rich, but very few understand what “being rich” actually means. As a site that educates people about money, we don’t just want to help you get more of it.

Instead, we want to help you cultivate a more meaningful view of money

For instance, did you know that there are different types of money? And that wealthy people don’t view a dollar as a dollar but as a store and creator of value?

As a result, being rich is more than having a fat bank account. It’s more than being able to buy houses, cars, new clothes, or eating at fancy restaurants anytime you want.

It’s about mastering how to make money work for you.

This article is a 10-minute dive into the types, purpose, and history of money. 

By the end, you’ll know more than the average person does about money and the various roles it plays in our lives.

Let’s begin!

A Brief History of Money

The history of money goes back as far as 4,000 years ago, when bartering with goods and livestock was one of the common types of early money.

The first known coins were minted by the Lydians in Asia Minor in 600 B.C. Coins became widely used throughout all of Asia Minor, Ancient Greece, and Ancient Rome.

Paper money originated in China during the seventh century A.D., but wasn’t widely used until Marco Polo introduced the paper currency to Europe in the 13th century.

In the late 1800s and early 1900s, checks became popular as a way to write an IOU and soon took over as the preferred method of commerce.

Today, money takes a range of forms — from physical cash to digital forms like credit cards and PayPal accounts.

The 5 Main Types of Money

According to economists, the different types of monetary systems are:

  • Fiat
  • Commodity
  • Representative
  • Fiduciary
  • Commercial bank money

You may be thinking, “I’m not an economist, so why does it matter?

Because too many people (maybe even you), measure their self-worth by the numbers in their bank account.

Our society considers wealth as an achievement and being poor as a failure. This belief isn’t just harmful, but also 100% wrong.

For a more realistic view of money, you need to understand the different types:

1. Fiat Money

Fiat money is the “money” you use daily. This includes national currencies, such as:

  • US Dollar ($)
  • European Euro (€)
  • Japanese Yen (¥)
  • British Pound Sterling (£)

This type of money only holds value because a government says it does. In other words, a $100 bill is essentially worthless by itself. You can only use it to buy stuff only because the US government says you can.

2. Commodity Money

Unlike fiat money, commodity money has intrinsic value. 

This means it’s valuable regardless of what the government says. Examples include gold, salt, rice, barley, tea leaves, silk, peppercorns, and more.

So that table salt you have in your pantry? That used to be a form of money in ancient civilizations. 

So if you traveled back in time and tried to buy meat using a $100 bill, the butcher would have turned you away since you couldn’t pay with salt.

3. Representative Money

Representative money is a type of currency that represents something else. 

For example, owning a gold certificate means you own an equivalent amount of physical gold. 

The idea of representative money also applies to stocks, bonds, and other types of financial instruments.

4. Fiduciary Money

Fiduciary money is the kind of money that we give, borrow, or spend. Because fiduciary money can be created out of thin air at any time by any entity that has a license to print it (like the Federal Reserve), it’s an essential tool for creating economic growth. 

However, this is also one reason why financial experts recommend investing in other things besides cash. 

Printing too much money will drive its value down, so you don’t want to be at the mercy of the Federal Reserve when it comes to your financial future.

5. Commercial Bank Money

Commercial bank money is created when banks give out loans. Other examples include your checking account, credit card, and the digits on your debit card.

When you get approved for a bank loan to buy a car, pay for college tuition, or start a business, commercial bank money was just created out of thin air.

Here’s the thing: banks don’t give out loans just to be nice. 

They’re doing it to get richer from your debt.

An example of this would be giving someone with poor credit history an interest-heavy loan anyway because it increases the odds that they won’t be able to pay back the loan in full. 

Banks earn a ton of money from interest rates and eventually, through other methods like repossessing your property.

The takeaway? 

Don’t let money define who you are, because its value often depends on forces beyond your control.

The 3 Key Features of Money

To be accepted as a form of money, an item must have certain characteristics. It should be:

1. Fungible

Fungibility is a fancy word for one dollar being worth the same as another dollar.

For example, if you owe $20 to someone and you pay them with a $20 bill, they don’t care if it’s a new bill or an old one; it’s still worth $20.

That’s why we can use the same bills over and over again. It doesn’t matter if it’s Mark Zuckerberg’s or your own money, it’s still fungible. 

2. Portable

Money should be easy to transport from one place to another.

For example, a piece of gold that weighs over 100kg is not very portable and would make paying for a cup of coffee at your local cafe difficult.

Enter cash, coins, credit cards, debit cards, etc.

3. Scarce/Limited

Finally, the supply of a form of money has to be limited.

If there was an unlimited amount of money in circulation then each dollar would lose value because there would be too much money available. 

Why Money Exists & Why You Should Care

What is the purpose of money?

The answer is straightforward, but it’s also surprisingly complicated: money serves as a medium of exchange, a unit of account, and a store of value.

That might sound like a mouthful, but understanding what they mean will empower you to make smarter financial decisions:

Money is a Medium of Exchange

At its most basic level, money is anything that can be used as payment for goods and services.

In other words, you use the money to buy things.

However, just because you have a lot of cash doesn’t mean you’re rich. Currencies like the US Dollar are vulnerable to inflation, which means you can buy less with your money while goods and services become more expensive.

To protect yourself, you need to invest in other financial instruments that are more stable and not prone to the government’s problems or whims.

Money is a Unit of Account

As a unit of account, money quantifies the value you’re giving.

Take salary, for instance. It represents the value of a job. That’s why some jobs pay less, while others pay more.

So if you want to make more money, you need to provide greater value.

This is why you should be careful about quick money hacks (e.g., NFTs and get-rich-schemes).

Since it’s not clear how they create value, you should be careful about betting your savings on them. Always research anything you want to invest in, and make sure they’re actually creating real value.

Money is a Store of Value

A store of value is an asset that retains its value through time.

Money is a store of value because it can be saved, taken, and exchanged at a later period for goods, services, or financial assets.

This is where the importance of money management comes in.

Saving, avoiding debt, and being mindful of your finances will help you accumulate money.

In turn, this helps you build a more stable financial future. The more value or money you store away, the more peace of mind you get no matter what happens in your life.

Takeaway: A healthy relationship with money begins by understanding it

Ultimately, it’s important to realize that money is a tool — an incredibly powerful tool — that can enable you to live life on your terms. 

And just like any tool, the better you understand how it works, the better you can use it to reach your dreams and goals.

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