Fiat Money vs. Commodity Money

Main Difference

Money has great importance from trading point of view. As we are living in 21st century, we can’t think of buying and selling without a legal tender. Fiat money and commodity money are two type of money that allows you to trade in an economy. The main difference between fiat money and commodity money is that fiat money is a currency that is declared by the state or government as a legal tender or means for economic transactions while commodity money is a money whose value is associated the commodity or goods of which it is made like gold, silver, precious stones, etc.

Fiat Money

fiat-moneyFiat money is a currency that is declared as legal tender or means of economic transaction by the government or law. In case of fiat money, value of currency comes from the government or law. Unlike representative money, fiat money is not backed by the precious metals such as gold or silver that has uses other than as a medium of exchange. Its value is unrelated to the value of any physical quantity.  In case of fiat money, the face value of money is greater than its token value. However, it has no sense in real terms. Fiat money was first used in China in 1,000 A.D. Since then it has been used widely by carious countries concurrently with commodity currencies.

Commodity Money

commodity-moneyCommodity money is a type of money whose value comes from a commodity or goods of which it is made. It is made of those objects that have value in both in themselves and their usage as a money. These often includes: precious metal like gold, silver, copper, and pepper corns, tea, precious stones, shells, alcohol, cocoa beans, cigarettes, etc. All above mentioned products contains value in themselves as well as value in their use as money. A main feature of commodity money is that its value is directly perceived by the users of commodity money, who recognize the utility of the token as they would recognize the goods themselves. It is similar to barter systems but distinguished in that sense it is not a single recognized unit of exchange.

Key Differences

  • Fiat money is a legal tender that is declared for mode of exchange by government while commodity money is not a legal tender.
  • Fiat money has only face value while commodity money has both face value and token value.
  • Fiat money has no value without the guarantee of government or law. A piece of paper has value because it is guaranteed by the law. Commodity money has value and other use such as gold, silver, jewelry, metal coins, etc.
  • Risk of inflation and deflation is most associated with fiat money because its value as not intrinsic. While commodity has intrinsic value but risks large price fluctuations based on changing commodity prices.
  • Fiat money is an acceptable mode of transaction at global level. It can be divided into standardized units while it is hard to divide commodity money into standardized quantities to create different unites of value.

Video Explanation

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