Forms of money

Free market money

Its creation is not monopolized, its adoption is voluntary.

Examples: collectibles, rai stones, gold or bitcoin.

Fiat money

The word "Fiat" originates in Latin, meaning decree, order.

The currencies issued by central banks are fiat money, like the US dollar or euro.

It is imposed by the state, usually by decrees that establish legal privileges, enforced through legal tender laws.

The legal tender legislation implies that it is required as an Unit of Account for the calculation of private incomes and balances, from which taxes are derived. This creates risk when using a non-official currency because of the exchange rate fluctuation.

To guarantee a privileged distribution when it is first introduced, the exchange of the previous form of money, such as the exchange of gold for US dollar in 1933, may be mandatory.

Its distribution is also benefited by its use as payment for public expenses. 

 

Legal tender laws usually mean that money is valid for extinguishing any debt unless there is a specific agreement to the contrary. It creates risk for the merchants that create contracts in a non-legal tender currency, because after an exchange rate fluctuation, payment with the devalued money is legal.

This privileges the adoption of the legal currency and, therefore, its saleability; which implies forced benefits in its function as a Medium of Exchange.

The rulers have the monopoly of production by the enforcement of anti-counterfeit statute, which allows them to extract seigniorage (an indirect tax on money adopters): the difference between its purchasing power and its production cost.