10.2 Commodity vs Fiat Money

Money has taken a wide variety of forms in different cultures. Gold, silver, cowrie shells, cigarettes, and even cocoa beans have been used as money. These items are examples of commodity money, which means they also have a value from use as something other than money. Gold, for example, has been used throughout the ages as jewellery, art, and money. Gold is a good conductor of electricity used today in the electronics and aerospace industry.

Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or some other commodity held at a bank. As economies grew and became more global, commodity monies became more cumbersome. Countries moved towards the use of fiat money. Fiat money has no intrinsic value but is declared by a government as a country’s legal tender. Canadian paper money is a legal tender. In other words, by government decree, if you owe a debt, then legally speaking, you can pay that debt with the Canadian currency, even though it is not backed by a commodity. The only backing of our money is a universal faith and trust that the currency has value.