Commodity Money Vs. Representative Money

Various commodities have been used as money; typically, the one that loses the least value over time becomes the accepted form. The use of gold as money began thousands of years ago in Asia Minor.Commodity money retains its value despite what may happen to the monetary authority.Gold was a preferred form of money due to its rarity, durability, divisibility, fungibility and ease of identification, often in conjunction with silver.

A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. Three types can be distinguished: specie, bullion, and exchange.

The gold specie standard (monetary unit) is associated with the value of circulating gold coins or the monetary unit has the value of a certain circulating gold coin, but other coins may be made of less valuable metal.

The gold bullion standard is a system in which gold coins do not circulate, but the authorities agree to sell gold bullion on demand at a fixed price in exchange for the circulating currency.

The gold exchange standard usually does not involve the circulation of gold coins. The main feature of the gold exchange standard is that the government guarantees a fixed exchange rate to the currency of another country that uses a gold standard (specie or bullion), regardless of what type of notes or coins are used as a means of exchange. This creates a de facto gold standard, where the value of the means of exchange has a fixed external value in terms of gold that is independent of the inherent value of the means of exchange itself.

Bretton Woods system
After the Second World War, a system similar to a gold standard and sometimes described as a "gold exchange standard" was established by the Bretton Woods Agreements. Under this system, many countries fixed their exchange rates relative to the U.S. dollar and central banks could exchange dollar holdings into gold at the official exchange rate of $35 per ounce; this option was not available to firms or individuals. All currencies pegged to the dollar thereby had a fixed value in terms of gold.
Starting in the 1959–1969 administration of President Charles de Gaulle and continuing until 1970, France reduced its dollar reserves, exchanging them for gold at the official exchange rate, reducing US economic influence. This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led U.S. President Richard Nixon to end international convertibility of the U.S. dollar to gold on August 15, 1971 (the "Nixon Shock").

In December 1971, the “Smithsonian Agreement” was reached. In this agreement, the dollar was devalued from $35 per troy ounce of gold to $38. Other countries' currencies appreciated. However, gold convertibility did not resume. In October 1973, the price was raised to $42.22. Once again, the devaluation was insufficient. Within two weeks of the second devaluation the dollar was left to float. The $42.22 par value was made official in September 1973, long after it had been abandoned in practice. In October 1976, the government officially changed the definition of the dollar; references to gold were removed from statutes. From this point, the international monetary system was made of pure fiat money.

Commodity money is inconvenient to store and transport in large amounts. Furthermore, it does not allow a government to manipulate the flow of commerce with the same ease that a fiat currency does. As such, commodity money gave way to representative money and gold and other specie were retained as its backing.

Representaive money is any type of money that has face value greater than its value as material substance. Used in this sense, fiat money is a type of representative money.

By: Abhishek Sharma