Monetary System is the government policy and framework which creates money for the local economy. Every government has enough power to control the local economy. They can control the amount of money which traffic in the market. The government uses the central bank to influence the monetary policy in the country.
Type of Monetary System
It is the monetary system which has valuable commodity back up the money value. As we know that money just a piece of paper or metal, but people give trust in the value of the money. In order to maintain its value, the government only prints the money amount equal to commodity value. For example, when they print a $100 bill they must ensure that there is $ 100 value of the commodity to back up. And gold and silver are the most common type of goods which government use to present value of money.
It is the monetary system in which the money can be exchanged with a valuable commodity. However, it different from the commodity monetary as the government does not hold any commodity to back up the money value. For example, we can use the $ 100 bill to exchange for gold/silver which has a $ 100 value. But the government does not have enough gold/silver to back up all money in the economy.
Fiat money is the monetary system in which the government guarantees the value of money but it is not backed by any valuable commodity. Moreover, we cannot exchange the money with any gold or silver. However, the government guarantees the money value which enables it to exchange other goods or services between buyer and seller. It is the legal currency and the government will punish anyone who refuses to accept the currency in exchange for goods or service.