What comes to mind when you hear the word “money”? Well, besides having a lot of it. No, not just a lot, but a lot, a lot. Usually we immediately think of banknotes, so crisp and pleasant to the touch. However, these objects are only representations of expressed value, that is, they have no value in themselves, but have a value accepted by agreement. So you have a passionate love for plain paper. Today, on the other hand, we have cash, checks or just numbers in our virtual accounts, but the principle of how money works remains the same.
What is money?
Money is a type of asset or commodity that is accepted in society as a means of payment in economic and commercial exchanges. To keep it simple, let's put it simply: it is an asset (commodity) that serves as a unit of account and a store of value. It serves as a kind of measurement of the value of things, thus making our lives easier (or vice versa) in terms of exchange and transactions between people.
They are worth nothing at all, absolutely nothing, but they have an exchange value, abstract and symbolic, that is, determined by agreement. This notional value expresses essentially the same thing, even if the scale of representation changes (for example, how many dollars or hryvnias are equivalent to paying for that delicious pie).
They are issued by a body that certifies their value and controls their circulation. In the modern economy, the king and god is the central bank of each country. It, and it alone, decides how much to print and when, how many banknotes to withdraw from circulation and why.
They can be expressed in various forms. Most of them circulate from hand to hand anonymously, but by mutual consent. They are part of a socially and institutionally approved economic system, whether we like it or not. This is what makes them different from any other similar goods. This is why we will not be able to sit at home, dreaming of a Ferrari, cut up pieces of paper and paint them, and run out to buy a cool car.
There are different forms of them, depending on the presentation and the system used to hold their value. Thus, we can distinguish the following types:
- Fiat. Having no intrinsic value, this money is issued by the state and derives its value from confidence in the economic stability of the state. Applies to the hryvnia, dollar, yen, euro, and many others.
- Commodities. Consist of goods or services that have their own value, are exchanged for other goods or services, and are capable of being used independently. This is the case of cocoa beans, which were traded by some pre-Columbian cultures.
- Electronic or e-money. Does not have a physical form of representation, but exists in computer systems and is issued in electronic form. Refers to bank transfers and e-money (not to be confused with Bitcoin - that's a completely different story).
What is fiat money?
Fiat money is a currency that is not backed by physical assets, goods, or precious metals, and has value only as long as we trust its issuer, the country's government. Also known as fiat currency, it replaced the so-called gold standard, a monetary system in which banknotes had intrinsic value because they were backed not by words but by deeds. More precisely, by gold.
In practice, banks accumulated huge reserves of gold to support the value of their currencies. Whenever the government wanted to issue paper money, it had to increase its reserves. If the country managed to buy more gold without issuing new paper money, the old paper money increased in value. After World War I, the United States, and of course the leading countries, began to convert their systems to fiat.
Advantages
- The main advantage is that Fiats are not in short supply (but here's how to check).
- Low production cost. Even taking into account all the technologies for creating banknotes and coins that are impossible to counterfeit.
- Easy to use and store. Reduces government costs for managing them. In addition, they are used by almost all countries, making them easier to incorporate into international trade.
Disadvantages
- Since there is no link to any tangible asset, their value depends on responsible government regulation and fiscal policy. What could it lead to? Look at the world. Comments are unnecessary. Irresponsible monetary policy, inflation and even hyperinflation.
- The likelihood of bubbles, an economic cycle in which prices rise rapidly and then fall even faster, is increasing. While the economy is being stimulated, quantitative easing is leading to rising inflation, affecting everything from the price of a loaf of bread to the government budget deficit. But you see.
- Dependence on trust. These funds exist because people still have trust in governments and financial institutions. No trust, no money.
Examples of fiats:
- United States Dollar (USD). One of the most widely used currencies in the world. Used for international financial transactions.
- Euro (EUR). The currency of the European Union. Widely used in the countries of the Eurozone.
- Hryvnia (UAH). The national currency of Ukraine. Supported by the national government.
Thus, fiats are the foundation of the modern economy, existing thanks to the trust and support of the state. Their strength and value change under the influence of economic and political processes, so it is important to constantly monitor the stability of national currencies.
Commodity money
Commodity money is a special form of money represented in the form of goods or raw materials. Thus, it is an alternative form of value exchange in which goods are used directly as payments.
Their concept has historical roots and was practiced by early civilizations. In many cases, they were used as a substitute for coins (which can be especially beneficial in times of economic instability and inflation). Their value is based on the intrinsic value of the goods that underlie them, whether in the form of precious metals - gold, silver, or in the form of other goods - grain, livestock, and even works of art.
Today, they are typically used in specific niche markets or as a hedging mechanism against the volatility of traditional currencies. For example, commodities such as oil, gas, or grain can act as commodity money because their value is directly related to supply and demand. Therefore, companies operating in these sectors may also hold reserves in commodity money to hedge price fluctuations and meet payment obligations.
They provide an opportunity to diversify investment portfolios. Investors can participate in markets independent of fiat and store their capital in the form of commodity investments, such as works of art or precious metals. This can preserve the value of their portfolios during times of economic uncertainty or financial turmoil.
Advantages
- Real value. Have independent utility and can be used for their intended purpose, even after ceasing to be a medium of exchange.
- Universality. Their value is recognized in different regions regardless of national borders.
- Independence from the issuer. The value is not affected by the actions of central banks or governments.
Disadvantages
- Inconvenience in handling. Large or heavy goods are difficult to transport and store unless you are Jack Sparrow and have the Black Pearl waiting for you around the corner.
- Divisibility problems. Some goods are difficult to divide into equal parts without losing their properties.
- Variability in quality. Furs can be of different quality, grain can spoil, and salt, oops, dissolve.
- Limited supplies. Rare goods can run out, leading to volatility in their value.
Examples of commodity money:
- Gold and silver are some of the most common types used in coins even now.
- Salt was used for calculations in ancient Rome and Africa.
- Furs were used in trade in Russia and North America.
- Cowrie shells served as currency in Asia and Africa.
- Iron ingots - used in Africa and Europe.
Overall, they can be an interesting alternative to traditional currencies for storing value and creating opportunities for diversifying investment strategies. Although they are less common in the mainstream financial sector, they remain an important aspect of economic history, and can be very useful for certain investors and markets.
Electronic money
Electronic money is the digital equivalent of traditional cash used for payments and transfers electronically. It exists exclusively in digital format and is stored in bank accounts, electronic wallets or special payment cards. Its main feature is the lack of physical form, which makes it convenient for cashless payments. But it should not be confused with cryptocurrencies. They and cryptocurrencies may look similar, but there are several important differences between them.
The functioning of e-money is based on digital technologies and the Internet. They can be issued by banks, payment systems or specialized financial organizations. The main mechanisms of operation are:
- Replenishment of an electronic wallet from a bank account or in cash through terminals.
- Making instant payments in online stores, mobile applications or between users.
- Transfers between accounts without the need for paper bills or coins.
- Integration with bank cards for simplified access to funds.
These operations are secured by sophisticated security systems, including data encryption and multi-factor authentication.
Advantages
- Convenience and speed. Transfers and payments are made instantly, regardless of location.
- Minimal costs. Fees for electronic payments are usually lower than for traditional banking transactions.
- Global availability — can be used for purchases and transfers worldwide.
- Transparency and control - all transactions are recorded, which simplifies the accounting of financial operations.
Disadvantages
- Dependence on technology. Lack of internet or technical failures can limit access to funds.
- Cybersecurity risks. Possibility of hacker attacks and fraud.
- Regulation: They are subject to strict government control.
- Lack of anonymity. All electronic payments can be tracked.
Examples of electronic money
- Bank electronic payments (Visa, Mastercard, PayPal).
- Electronic wallets (Skrill, QIWI, WebMoney).
- Central bank digital currencies (CBDCs) developed by governments.
What is the difference between fiat, commodity and electronic money?
| Parameters | Fiat money | Commodity money | Electronic money |
| Material basis | Not backed by physical goods, nominal value | Have intrinsic value (gold, silver, fur) | Completely digital, no physical form |
| Functioning and use | Used in cash and non-cash form | Used in barter trade and as a universal medium of exchange | Available online, used for instant payments |
| Stability and regulation | State-controlled, inflation possible | Market dependence, physical preservation | Prone to technology risks and cyber threats |
| Acceptability and prevalence | Widespread, accepted by all | Limited by region and scope of use | Rapidly gaining popularity, but requires digital infrastructure |
Conclusion
So, the variety of money that exists in the world seems to reflect the entire history of mankind: from the first barter exchanges to modern digital revolutions. The fiat that we are used to seeing in our wallets has become the basis of a stable economy, despite its detachment from physical value. Commodity money reminds us of the stages when gold and silver coins jingled merrily in our pockets, and e-money today is changing our view of the economy, which is increasingly dependent on technology. Yes, they all have their own unique features, but they still perform the main function - to be a tool for exchange, storage and accumulation of value. So regardless of whether we have gold coins, plastic cards or cryptocurrency, money remains a symbol of trust and the driving force of economic progress.
