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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:

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.

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