There is more to money than just the buying power it comes with. The Federal Government has a lot of control over the value of your individual buying power. So, understanding the difference between the 3 different types of available currency valuations is essential to taking control of your buying power. The 3 currency types to know are hard, paper, and fiat money. These base currencies provide a history and understanding of why the government does certain things. Like, such as providing a COVID relief stimulus fund during the pandemic. Understanding how money and assets work will allow you to take better advantage of the resources the government provides you on a daily basis.
Type 1: Hard Money
This is the most classic type of money. It is the second thing people think about when they think about money. We are talking about gold and silver baby! But what does that exactly mean and how does it affect your understanding of world economics today? Well, let me explain. Hard Money is when a currency is backed by a valuable type of commodities such as gold and silver. Countries do this so that they can hedge against loans made to their government. It is also an indicator of the economic health of a country.
This is accomplished when a country has actual physical stores of gold bars held in a vault and they print money based on the value of gold that they have. When they have to pay their loans back to another government they provide the gold in their stores. There is a more complex explanation but I won’t get into that here. That is an example of hard money. It is how people traded and valued currency back in the day. In fact, the United States backed the US Dollar with gold as recently as 1971!
Type 2: Paper Money
This one is easy. Paper money is the physical cash that you carry around. It is a medium in which to purchase goods and services. Paper money doesn’t hold any specific value. This form of currency derives that value from the accepted medium of exchange it has been provided by the US Government. Paper money is usually tied to two types of values fiat money and hard money (which we just discussed).
Type 3: Fiat Money
The opposite of this is hard money. Hard and fiat money has one key difference. That is the backing of the currency. A physical commodity, like gold and silver, backs hard money currencies. While the government entity issuing the currency backs fiat money. For fiat money, the value is derived from the supply and demand as well as the stability of that government entity.
Type 4: Digital Currency or Crypto Currency (Bonus)
This one is new and has gained a lot of popularity, as early as 2010. A few of these currencies are bitcoin, Ethereum, and Dogecoin. This is a new way of looking at money and is huge uncertainty. Being a product of the digital age and the 2000s, there isn’t much to know or understand regarding this currency and how its valuation is figured. Therefore a lot of big-time investors and countries have stayed away from digital currencies. Unlike other currencies, digital currencies are not backed by anything and are extremely volatile. I own a few cryptocurrencies myself but I’m not one of those frequent traders.
The 3 currency types to know here are important because of how much they shape not only our economy but the world economy. One of the best books I’ve ever read was by Ray Dalio, check it out! There are a lot of good nuggets in this book and it is one of the best books that explains our economy. That would be a good follow-up to reading this article and diving deeper into this topic.