Two Types of Monetary Standards Explained

There are two types of monetary standards, one far more prevalent in developed economies than other. Monetary standards refer to the ‘system’ or ‘framework’ that controls or facilitates the movement of money.

The two monetary standards are:

1. Commodity Standard.
2. Inconvertible ‘managed’ paper standard.

1. The Commodity Standard

This standard exists where the value of monetary units equal the value of specific amounts of commodity (for example gold).



Example of commodity standards:

    monometallic / metallic coin standards
    metallic exchange standard
    bimetallic standard

There are some pros and more cons. There are evidently problems with these standards since we have discarded them as the monetary standard of choice. One inherent problem for the bimetallic standard is described in Gresham’s Law.

On one hand it does restrain the government from excessively expanding the money supply because MS is driven by physical availability of metal not political experience. However, metal reserves may expand excessively, or conversely contract when the economy needs liquidity to grow.

Pros also include the intrinsic value of silver and gold. Cost of producing metals is inversely related to general level of prices (it provides stability to economic output and prices), however, the process may be too slow. The answer? Fiat money (paper).

2. Inconvertible ‘managed’ paper standard.

This monetary standard the ‘creature of the state’ created by the government exists. (Another term is ‘fiat’ money –> legal tender). This system only works because the government values the legal tender and the public accepts the standard. The public has to accept the standard since the paper itself isn’t actually worth anything–it’s an abstraction. It fails when the government does not exhibit proper economic restraint and responsibility (i.e. massive hyperinflation).

There are two basic monetary standards. Most are familiar with the second since it remains predominate in developed economies. Questions and comments are as always welcomed.

5 thoughts on “Two Types of Monetary Standards Explained

  1. WebVirtual

    This is a fascinating subject and I’m glad you started this topic. I have been so naive all my life regarding Fiat Money that because so many concepts reletad to economy are disguised under fancy terminology that I never really knew how much of the money value depends on just people’s trust, confidence or belief, rather than on any kind of material backup. For example I learned just last year that a banking license is not a permit to open an institution which can guard people’s money in a vault, instead is an institution with the right to invent money out of nothing. This nothing concept diguised under the term “Leverage”. In other words, I thought when I went to a bank with let’s say 1 million in assets and I asked them for a 1000 loan, when they handed me the loan the bank would have 1 million minus the 1000 which they gave me, until I repay it along with interes. But I was apalled to find out that this is not the case. When I am granted the loan and I have their money in my hands the bank automatically enters in their books that now they have 1 million plus my 1000 plus the interest I will pay. They can invent or add to their assets 9 dollars out of the blue, from each dollar they have in their balance. What supports the 90 % of the money held by banks… ?? nothing. So with this nothing value thin air back up fiat money they get a chance to leggaly take over our homes when we don’t repay.. and of course they dont care if the repossed house sells for 10 % of the money own since that is the only money they actually gave you. Next time you get a loan just tell them you want the money in e-gold. Tell them to buy the equivalent of the moeny they will give you in a gold certificate where the gold is certified to be safe in a vault… and see what happens.

  2. Evan

    I think the description of “money as a creature of the state” needs at least another point added. That is, the government creates the desire to hold it’s money through taxes. If the governmnet did not tax the public then it could be that no one would use the fiat issued by the government. But since we know with certainty that the fiat is useful for an expense that we have to pay, then there is good reason for us to use it.

  3. barry econ

    Taxation isn’t the only reason to hold money. The government makes cash through other means like bonds.

  4. I’m wondering when we will ditch money altogether. It is already happening in many countries that money has gone digital. We use credit/debit cards, our paychecks are cashed through direct deposit. I have a few friends who don’t carry money around with them at all. Even at my university the parking meters take credit cards. Are we giving too much confidence in the government, or is this a natural extension of “fiat” money?

  5. Queenie_SALZAR06

    qwqwq

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