Commodity money v Fiat Money

Commodity money is a currency where the value of money is determined based on the value of the material in which it is produced.

The most common example of commodity money is gold. However, other interesting examples are products like tobacco in prisons or livestock in developing markets.

Fiat money is currency which has no intrinsic worth, but is backed by the government which printed it. Fiat currency only has value if we trust that other people will be willing to exchange goods in exchange for the fiat money.

Can you experience inflation with commodity money?

Yes, it is possible to experience inflation with commodity money. Suppose that a country is using gold as a form of commodity money. Now suppose that a very clever scientist was able to transform water into gold and this scientist shared his results with everyone. Since everyone would be able to produce gold, its value would decrease compared to other goods within the economy and the price of all other goods would increase. On a much smaller scale, this same effect occurs when a new mine is discovered and the supply of gold increases.

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