Money plays a pivotal role in our lives, yet its complexities are such that no one can be totally free of misconceptions about it. This article deals with only a few basic ideas, but it should help those who want to gain a better insight into what money is and how it works. All references are to the money system in the U.S. and do not necessarily apply to other countries. The money system today is based on fiat money , not on commodity money . The distinction is important.
Commodity money involves a commodity with intrinsic value that is accepted as a medium of exchange.
It can take the form of the commodity itself like bushels of wheat or gold coins, or it can be a certificate of ownership of that commodity. The certificate derives its value from that fact that it can be exchanged on demand for a specific quantity of the commodity. Commodity money is no longer in general use, having been almost universally replaced by fiat money. Yet many people still think of money as the thing of value itself rather than the token for value. To properly understand a fiat money system, one should avoid being misled by concepts that have meaning only in the context of a commodity money system.