I have read that the US currency is regarded as fiat currency while the Canadian dollar, as one example, is regarded as a commodity currency. According to what I read, that means the Canadian dollar is backed by a commodity that has value while the US dollar is not. What does Canada use to back its money?
Interestingly this article also said that in a fiat currency, if the money is partially destroyed, the government will replace it. But with commodity currency, partially destroyed money only has the value of the part that is not destroyed. In other words, if you have half of a Canadian $10 bill, you have five dollars only. The bill will not be replaced. Is this true?
[I]Fiat money, if physically represented in the form of currency (paper or coins) can be accidentally damaged or destroyed. However, fiat money has an advantage over representative or commodity money, in that the same laws that created the money can also define rules for its replacement in case of damage or destruction. For example, the U.S. government will replace mutilated Federal Reserve notes (U.S. fiat money) if at least half of the physical note can be reconstructed, or if it can be otherwise proven to have been destroyed.[27] By contrast, commodity money which has been lost or destroyed cannot be recovered.[/I]
In FOREX commodity currencies generally refer to the Australian Dollar, Canadian Dollar, New Zealand Dollar, and the South African Rand.
FYI, Australian Dollar depends on gold and other minerals. Canadian Dollar is correlated with oil, NZ dollar has 63% correlation to commodities in general and South African Rand is correlated to gold as well.
When a currency is correlated strongly with a certain commodity it moves in tandem with the price of that commodity.
I have attached a chart of USD/South African RAND (USD/ZAR) and superimposed gold on it. As you can see there is a very strong correlation between these two. When gold gets stronger ZAR gets stronger and USD/ZAR falls.
There is no currency backed by commodities or Gold. All member countries of the International Monetary Fund [IMF] are required to use FIAT.
The last country who had to give up a potential return to a gold backed currency, the Swiss Franc [CHF], was Switzerland in 1997 as it became a member of the IMF.
FIAT literally means…
[B]Government issued by fiat (Latin for “let it be” or “so be it” - money simply ordered into existence by the sovereign)[/B]
In regards to destruction of coins and bills it is not true what the article implies.
A destroyed coin or bill is replaced as face value exactly 1:1 meaning you’ll get a $10 bill replaced by a $10 bill for instance.
The author of that article confuses the replacement of coins and bills with inflation and de-valuation of a currency.