Question

What is the difference between commodity, commodity backed and fiat currency? What are the positives and negatives of using each type?

Answer 1

	Commodity money	Commodity Backed money	Fiat money
Meaning	It is the oldest type of money. Generally, a scarce resource is used to buy or sell things. It's value is defined by the intrinsic value of the commodity. Example- Shells, spices, cigarette etc.	It is a medium of exchange whose value is guaranteed to be converted into a valuable commodity. It has no intrinsic value.	The government declares a money to be used as a legal tender. It means everybody in the country has to accept it as a medium of exchange. Fiat money get it's value from government order (fiat). It has no intrinsiccic value.
Positives	It serves dual purpose as both the money and the vommodity have value.	As it is backed by a commodity, it stabilizes the currency.	No physical commodity is necessary. It is easier to increase the money supply.
Negatives	Double coincidence wants is necessary. The commodity may be perishable, indenominated, varying quality etc.	Money supply cannot be increased without increasing the supply of commodity. Generally commodities like gold, silver are used because of which poor nations suffer.	Tying an economies money to fiat money is very dangerous. As it is not backed by any real commodity.

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