Types of Money
Types of Money
Money, unlike many other things in life, does not just appear out of thin air. It takes work to get money. In fact, there are many ways to make money, but they can be separated into four main categories: money for personal use, money for lending, money for business use, and money for retirement or investing.
The first category, money for personal use, refers to the money you may have saved up from your pay checks or monthly bills. This money can be invested in stocks, bonds, mutual funds, or any other form of investment that might gain interest. A lot of people find that the interest on their savings account is more than what they earn in a year. When you borrow money from a commercial bank, it is called bank money. The amount of money that a commercial bank can lend you varies according to its own policies.
Money for lending comes from two sources: fiat money, which is the currency of a nation that cannot be taken away by government seizure, and physical commodities, which are money and goods that cannot be produced outside a country. The value of both of these types of monetary units is usually derived from their country’s market production. When a nation produces more commodities than it needs, it earns more money. Usually, all money that is ever issued is done so in fiat money.
Money for business uses typically comes from gold, silver, and copper. Gold is considered the purest form of money, because its value is never affected by the government in question. Silver, on the other hand, is a good medium between gold and paper money. People usually buy silver bullion bars for this purpose. The price of silver has fluctuated greatly over the years, but is still far above the monetary value of the metals’ average production.
Money for trading purposes is called foreign exchange (forex) money, since it is not usually issued by a country. Instead, it trades hands according to supply and demand between various nations. For example, the United States government prints fiat money, and the European Central Bank buys it from the U.S. Treasury.
Cryptocurrency is a relatively new type of money system, designed to facilitate peer-to-peer transfers of money without the use of a government-backed currency. In a typical digital transaction, the money is programmed into a computer program, and then is transferred from one computer system to another. Most commonly, this occurs through the Internet. The benefit of this type of transaction is that it is free of any potential government sanctions. However, it can be susceptible to hackers who can steal the information that is programmed into the system.
At the same time, certain forms of this transaction cost nothing to the parties to the exchange. When a currency is bought and sold in this manner, there is no cost to the seller or buyer. This is an appealing feature to many people who are interested in saving money on transaction costs, and who would like to participate in future transactions with one another while avoiding any potential government penalties. Since there is no physical money being transferred, this also has a drawback of its own.
Commodity money, sometimes called precious metals, are typically bought and sold for their value rather than for the value of the particular commodity they represent. Gold, silver, platinum, and oil are some of the most common commodities being represented. They are traded for their actual worth rather than as commodities. Because these items are typically sold for cash, they are subject to double coincidence, which means two of them are brought into existence at the same time.