Kenneth R. Szulczyk
Second form of commodity money is representative full-bodied money. This money has
little inherent value, such as paper bills, but people can convert the money into a valuable
commodity, such as gold and silver. For example, if you possessed U.S. dollar bills before 1933,
you could exchange the bills for gold at the U.S. government’s exchange rate of $20 per gold
ounce. Most of humanity used commodity money before the 20th century until government and
central banks had replaced it with fiat money.
Governments and central banks created the second payment system, fiat money, and it is a
20th century creation. Most central banks in the world today use fiat money. In the United
States, the Federal Reserve System has the authority to issue U.S. dollars, and the public cannot
use this money for anything else. Furthermore, the people cannot exchange U.S. dollars for
another commodity from government. For example, if people do not want to use U.S. dollar bills
as money, it has no other function other than being fancy paper. Unfortunately, no authority can
limit the amount of money the Federal Reserve System can issue. If the Fed wants to inject an
additional $1 trillion into the economy, it could do so easily. However, a rapid expansion in the
money supply could be drastic to an economy. For instance, countries with high inflation rates
or hyperinflation have rapidly growing money supplies. Hyperinflation is a country’s inflation
rate becomes extremely high, and prices become meaningless. Subsequently, people stop using
money, and they resort to barter. We show a 100 - trillion Zimbabwe note in Figure 3. A noble
prize laureate in economics, Milton Friedman, stated, “Inflation is always and everywhere a
monetary phenomenon.”
Figure 3. One-hundred-trillion Zimbabwe note
Third payment system, a check, is credit money tied to a person’s checking account. Banks,
credit unions, and other financial institutions offer checking accounts to people and businesses.
Then people use checks as a medium of exchange, allowing them to purchase goods and
services. Once sellers accept a check, they present the check to a bank for payment.
Consequently, checks have three benefits. First, people and businesses do not carry cash.
Second, the check provides proof of a business transaction. Finally, checks become convenient
in large transactions, such as buying a house or car. Buyer does not need to carry a suitcase of
cash for this transaction. However, checks create two problems. First, the financial institution
charges fees for using checks, or the check writers abuse their accounts and write fraudulent