Kinds of Money

Commodity money is money whose form is itself a fungible commodity – historically gold, silver, or copper – valued for two properties that, on inspection, both turn out to be as much a matter of shared belief as any other form of money. Its use value is the tangible utility the commodity has independent of being money at all (gold's industrial and ornamental uses, for instance); its intrinsic value is the set of properties that make a substance a good medium of exchange – divisibility, storability, portability, scarcity, and resistance to counterfeiting. Neither property escapes the social dimension money always carries: a commodity is only useful as money once a community agrees to treat it that way, and its "intrinsic" desirability as a medium of exchange is itself an assessment made by that community rather than a property gold or silver possesses in isolation.

Fiat money is currency with no intrinsic value of its own, established as money purely by government decree or by the mutual agreement of the parties exchanging it. Its central advantage – that money can be created without needing any raw material to back it – is simultaneously its central danger: an oversupply of fiat money undermines the belief that sustains its acceptance, in the extreme case to the point of hyperinflation. Fiat money is the form in which essentially all of today's national currencies (see ISO 4217 Currency Codes) exist.

Bank money is money that consists purely of records, created by private banks recording loans as deposits. A loan is not money moving from one place to another; it is new money being created the moment a bank credits a borrower's deposit account, and that money is destroyed again the moment the loan is repaid. This mechanism, rather than the printing of notes, accounts for the overwhelming majority of the money supply in a modern economy – physical cash typically makes up under three percent of it. A useful reframing follows directly: depositing physical currency into a bank is not, conceptually, "storing" it, but exchanging government-supplied money for bank-supplied money, i.e. a claim on the bank rather than the original instrument itself.

Cryptocurrencies are a modern, non-standard fourth category: digital assets used as a medium of exchange, with ownership recorded via cryptography in a distributed ledger, typically without any central issuing authority. Whether a cryptocurrency is "really" money or currency in the stricter senses discussed above is deliberately left open here; for computational-finance purposes, cryptocurrencies share enough structural properties with conventional currencies – a code or symbol identifying them, a market in which they are quoted and traded, a notion of holding a position in them – to be handled the same way in most contexts, a stance ISO 4217 Currency Codes returns to when discussing informal, non-ISO currency symbols.