While there are only a few examples of commodity-backed money in use today, it remains an important concept in monetary policy and economics. Read ahead to find out more about it!
What Is Commodity-Backed Money?
Commodity-backed money refers to a type of currency that is backed by a physical commodity, such as gold or silver.
What You Need To Know About Commodity-Backed Money
The commodity-backed money definition is often confused with that of representative money, but these two terms don’t mean the same.
Representative money is a type of currency that represents a claim on a physical commodity or another form of money. Unlike commodity-backed money, it is not directly tied to a physical commodity, yet still represents value that can be redeemed. One example of this could be a banknote that can be exchanged for a certain amount of gold.
In modern times, there are very few examples of commodity-backed money, as most currencies belong to the fiat category, which means that their value is not backed by any physical commodity.
Here are a few instances of commodity-backed currencies in use today:
- Gold-backed crypto. Some cryptocurrencies, such as Tether Gold (XAUT), are backed by physical gold. For every unit of Tether Gold, there is one gram of gold held in reserve.
- Petro (PTR). Venezuela’s national cryptocurrency, the Petro, is backed by the country’s oil reserves.
One of the benefits of commodity-backed money is that it is not as easily manipulated as other forms of currency, such as fiat money, which has value because the government has declared it to be legal tender, but is not backed by a physical commodity.
However, commodity-backed money also features a number of drawbacks, such as a limited supply of physical commodities and inflexibility in terms of economic growth.
Thus, while commodity-backed money has some advantages, the setbacks of this system make it less practical for modern economies than fiat money, which is why the latter is the preferred currency system for most countries today.
