he size a nation’s money supply is determined differently if the nation uses commodity money or fiat money. Commodity money typically consists of valuable metals, especially gold or silver. Fiat money, typically paper money or coins, is of less value as a commodity than as money. It has value as money because people are willing to accept it. To increase the chance of people accepting its money, a government may make the currency legal tender. Then, the law requires people to accept the money at face value.

   If a nation uses commodity money, the money supply is determined by the cost of producing the metal and the rate of production. During the late 1800’s and the early 1900’s, the United States and many other countries were on the gold standard, which is a commodity money system. Each nation promised to redeem its currency for a specified amount of gold. For example, a United States dollar was officially valued at about 26 grains (1.7 grams) of gold. The amount of money that countries could issue depended on how much gold was being mined in the world. A decline in gold output during the 1870’s and he 1880’s slowed the growth of the money supply and caused prices to fall. The economic problems ended only after the discovery of new gold fields in South Africa and after the invention of a more efficient method of extracting gold from the rocks in which it is found.

   The United States and most other countries today are on the fiat money system. Under this system, the money supply does not depend on the production of any commodity. Instead, the national government largely determines the money supply though its monetary policy.

   The monetary policy is conducted by the nation’s central bank, which is a government agency in most countries. The central bank issue currency, regulates the activities of the nation’s commercial banks, and performs other financial services for the government. The Federal Reserve System is the central bank of the United States. The central bank of Canada is the Bank of Canada. Other central banks include the Bank of England in the United Kingdom, the Banque de France in France, and the Deutschland Bundesbank in Germany. 

 


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