Nov 04, 2021
Three types of currencies
We divide currencies into three categories: legal tender, asset-backed currency, and claim-backed currency. The difference between asset-backed currency and claim-backed currency is to distinguish between a secured claim and an unsecured claim.
Legal tender corresponds to an essentially worthless item that has value based on the belief that they will be accepted by valuable goods and services. A typical example is a currency. The paper currency with the 20-dollar bill is almost worthless. But consumers can buy coffee by handing over that piece of paper, because the barista believes that he can use this piece of paper to buy valuable things in turn. Of course, due to its legal tender status, the currency issued by the central bank is different from a pure legal tender. Legal tenders without legal tender status include Rai stones and Ithaca HOURs. Bitcoin is just another example of legal tender.
The value of an asset-backed currency, at least to a certain extent, comes from the assets that back the currency. A prime example is commodity currencies. Gold coins have intrinsic value because they can melt a coin and find people who want to use it for other purposes.
Finally, the right to claim supports the value of the currency, at least to a certain extent, from the commitment of some institutions to convert the currency into something of value. For example, the value of bank deposits is based on the bank's commitment to convert deposits into currency. Non-financial companies can also issue claim guarantee currency. For example, a barista can exchange a cup of coffee for a (fully punched) membership card. In this case, the membership card is a special type of currency that can be used to exchange valuable items. In principle, if others believe that the barista will honor her promise in the near future, as long as enough people want coffee, punch cards can be used to buy other goods like money.