Contemporary economic theory distinguishes between three main types of money: commodity money, paper money and bank money, and it views them as stages in the evolution of markets from barter to the current global system.

Commodity money is something which has inherent value. Its most common form is a “precious metal,” but it can be anything ranging from barley in ancient Sumerian culture to cigarettes in a prison black market.

Paper money can be notes that are exchangeable for some precious metal or other commodity or they can be debt contracts which are transferable.  When paper money is not exchangeable for a commodity, it becomes bank money which is essentially an entry in an accounting system tracking economic transactions.

Money is also categorized by how it is created or how its value is established.  Commodity money just acquires the value of the commodity.  Fiat money is declared by some authority to be legal tender for all debts and is supported by a legal infrastructure.  Its “value” is determined by the prices of goods or services which it can be used to purchase.   Money that is legal tender in one nation or region may not be accepted in another except through an exchange process, and some regional currencies are not exchangeable for other currencies at all.

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