We all take money for granted but did you know there are actually 4 different types of money?
How these evolved is actually linked to the history of finance and allows us to understand money on a deeper level. Finance from the outside in can seem complex but when we understand how it evolved and came to be it begins to become more understandable.
Below we discuss the 4 types of money. We can view the complete history of finance through this lens which is incredibly helpful. Use this to improve your ability to invest.
- Commodity Money – Once upon a time we traded and bartered in markets for the goods we received. A cow or a goat may have been bartered for a bushel of wheat. This in effect was money.
We used commodities as if they were money therefore this gave them the name “commodity money.” Gold could also be used as a means of transaction and therefore counted as this form of money.
- Receipt Money – With time banks appeared. They accepted deposits of our gold and in return gave us receipts. These receipts signified how much gold was held in an account. Whoever held the receipt had the rights to obtain the gold.
With time, the banks became so trusted that the receipts they issued were traded amongst merchants. After all, one was easily able to redeem them at the bank for the stated amount of gold. They were receipts that had value and used as money, and as such known as receipt money.
- Fractional Money – As time progressed banks realized that not all receipts were being redeemed consistently for their deposits. As such, they got a little greedy and began to issue more receipts than they could ever fufill. The gamble was that not everyone would ask for their gold all at once.
Of course if depositors got nervous that the bank might go under, they would rush to withdraw all their deposits. This would mean that some would be left short changed and very unhappy.
- Fiat Money – As trust in the banks grew as an accepted part of society. People began to accept the receipts in themselves as the money and virtually never redeemed them. The powers that be realized this and began creating money WITHOUT any limits whatsoever. This is what led to the current financial system.
Every unit of currency in your wallet and bank account came to be in this way.
The downside to this is of course the dreaded inflation. This is the whole reason that our currency is consistently valued over time. This is because money can be limitlessly made by banks which take advantage of a societal faith they created over many centuries. This came about because of the means we previously explained.
This we learn where origins of the current financial system began. Its rather more simple when we see how it evolved from the very beginning.