That is, the pieces of paper and plastic that form checks and bank cards are worthless unless there is something of value backing them up. After all, you would need humongous pockets just to carry all of this cash around, not to mention the security concerns.Īs you’ll see from the explanation below, fiduciary money is very similar to fiat money. If you had to buy something worth thousands of dollars with cash, this would be pretty impractical. It exists on the basis that, in reality, cash is a pain for larger transactions, with a few common examples of this being checks and debit cards.įor example, have you ever tried to purchase a plane ticket using cash? This is just about impossible to do. The next type of money is called fiduciary money, which is also sometimes called representative money. Related: 10 Best Personal Finance Podcasts for Beginners 2. Buying, storing, and transporting gold can be expensive, so this has largely been replaced by paper money instead. The most common type of commodity is gold, which is still often used as a form of currency today. That is, commodities often have to be stored and looked after so they aren’t destroyed by the elements or pests (which probably wouldn’t be great for your personal financial plan…), increasing overhead expenses. However, this means that this type of money can also be difficult to manage. There are still certain types of commodities that are used as a form of currency, including spices, tobacco, and shells.
You’ll often see this more frequently in developing nations. It also works better when people know each other, as there is a certain amount of trust that is inherent to the system. This type of system works fine in small communities where there is not a lot to swap. You will trade an item for something else. In general, this is like a barter system. In that case, these trading cards acted as a commodity, creating a form of currency that you would use amongst your friends. In this type of money, there is a specific item that is used as money.įor example, when you were a kid, you may have used Pokemon or Yu-Gi-Oh cards as some form of currency. The first type of money is called commodity money.
In general, there are four types of money.
What are the 7 characteristics of money?.
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