comes from a commodity
of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value
) as well as their value in buying goods.
This is in contrast to representative money
, which has little or no intrinsic value but represents something of value, and fiat money
, which has value only because it has been established as money by government regulation.
Examples of commodities that have been used as media of exchange
, decorated belts
, cocoa beans
. Several types of commodity money were sometimes used together, with fixed relative values
, in various commodity valuation
or price system
Commodity money is to be distinguished from representative money
, which is a certificate or token which can be exchanged for the underlying commodity, but only by a formal process. A key feature of commodity money is that the value is directly perceived by its users, who recognize the utility or beauty of the tokens as goods in themselves. Since payment by commodity generally provides a useful good, commodity money is similar to barter
, but is distinguishable from it in having a single recognized unit of exchange. Radford (1945) described the establishment of commodity money in P.O.W camps
People left their surplus clothing, toilet requisites and food there until they were sold at a fixed price in cigarettes. Only sales in cigarettes were accepted – there was no barter [...] Of food, the shop carried small stocks for convenience; the capital was provided by a loan from the bulk store of Red Cross cigarettes and repaid by a small commission taken on the first transactions. Thus the cigarette attained its fullest currency status, and the market was almost completely unified.
In another example, in US prisons after smoking was banned circa 2003, commodity money has switched in many places to containers of mackerel fish fillets, which have a fairly standard cost and are easy to store. These may be exchanged for many services in prisons where currency is prohibited.
The principles of commodity money inspire modern commodity markets
: the effect of holding a token for a barrel of oil
must be as close as possible economically to actually having the barrel at hand, despite its representation by a sophisticated range of financial instruments
In metallic currencies, a government mint
money by placing a mark on metal tokens, typically gold
, which serves as a guarantee of their weight and purity. In issuing this coinage at a face value higher than its costs, the government gains a profit known as seigniorage
The role of a mint and of coin differs between commodity money and fiat money
. In commodity money, the coin retains its value if it is melted and physically altered, while in a fiat money it does not. Usually, in a fiat money the value drops if the coin is converted to metal, but in a few cases the value of metals in fiat moneys have been allowed to rise to values larger than the face value of the coin. In India, for example fiat Rupees
disappeared from the market after 2007 when their content of stainless steel became larger than the fiat or face value of the coins.
In the US, the metal in pennies (97.5% zinc since 1982, 95% copper in 1982 and before) and nickels (75% copper, 25% nickel) has a value close to, and sometimes exceeding, the fiat face value of the coin.
A bronze okpoho
, the traditional commodity money in West Africa
until the 1940s.
Commodities often come into being in situations where other forms of money are not available or not trusted, and these are social norms. Various commodities were used in pre-Revolutionary America including wampum
, iron nails, beaver pelts, and tobacco
. According to economist Murray Rothbard
In the sparsely settled American colonies, money, as it always does, arose in the market as a useful and scarce commodity and began to serve as a general medium of exchange. Thus, beaver fur and wampum were used as money in the north for exchanges with the Indians, and fish and corn also served as money. Rice was used as money in South Carolina, and the most widespread use of commodity money was tobacco, which served as money in Virginia. The pound-of-tobacco was the currency unit in Virginia, with warehouse receipts in tobacco circulating as money backed 100 percent by the tobacco in the warehouse.
In Canada, where the Hudson's Bay Company
and other fur trading companies controlled most of the country, fur traders quickly realized that gold and silver were of no interest to the First Nations
. They wanted goods such as metal knives and axes. Rather than use a barter system
, the fur traders established the beaver pelt
as the standard currency, and created a price list for goods:
- 5 pounds of sugar cost 1 beaver pelt
- 2 scissors cost 1 beaver pelt
- 20 fish hooks cost 1 beaver pelt
- 1 pair of shoes cost 1 beaver pelt
- 1 gun cost 12 beaver pelts
Other animal furs were convertible into beaver pelts at a standard rate as well, so this created a viable currency in an economy where precious metals were not valued.
Long after gold coins became rare in commerce, the Fort Knox
gold repository of the United States
functioned as a theoretical backing for federally issued "gold certificates" representing the gold. Between 1933 and 1970 (when the U.S. officially left the gold standard
), one U.S. dollar
was technically worth exactly 1/35 of a troy ounce
(889 mg) of gold. However, actual trade in gold bullion as a precious metal
within the United States was banned after 1933, with the explicit purpose of preventing the "hoarding" of private gold during an economic depression period in which maximal circulation of money was desired by government policy. This was a fairly typical transition from commodity to representative to fiat money, with people trading in other goods being forced to trade in gold, then to receive paper money
that purported to be as good as gold,
and finally a fiat
currency backed by government authority and social perceptions of value.
Cigarettes and gasoline were used as a form of commodity money in some parts of Europe, including Germany, France and Belgium, in the immediate aftermath of World War II
(commodity money) from Kostkowice, Poland, 9th to mid-10th century AD
The use of barter
-like methods using commodity money may date back to at least 100,000 years ago.
Trading in red ochre
is attested in Swaziland
, shell jewellery in the form of strung beads also dates back to this period, and had the basic attributes needed of commodity money. To organize production and to distribute goods and services among their populations, before market economies
existed, people relied on tradition, top-down command, or community cooperation. Relations of reciprocity
, and/or redistribution, substituted for market exchange.
developed a trade and market economy
based originally on the commodity money of the Shekel
which was a certain weight measure of barley, while the Babylonians
and their city state neighbors later developed the earliest system of economics
using a metric of various commodities, that was fixed in a legal code.
Several centuries after the invention of cuneiform script
, the use of writing expanded beyond debt/payment certificates and inventory lists to codified amounts of commodity money being used in contract law, such as buying property and paying legal
Legal tender issues
Today, the face value of specie and base-metal coins is set by government fiat, and it is only this value which must be legally accepted as payment for debt, in the jurisdiction of the government which declares the coin to be legal tender. The value of the precious metal in the coin may give it another value, but this varies over time. The value of the metal is subject to bilateral agreement, just as is the case with pure metals or commodities which had not been monetized by any government. As an example, gold and silver coins from other non-U.S. countries are specifically exempted in U.S. law from being legal tender for the payment of debts in the United States,
so that a seller who refuses to accept them cannot be sued by the payer who offers them to settle a debt. However, nothing prevents such arrangements from being made if both parties agree on a value for the coins.
- ^ O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Prentice Hall. p. 246. ISBN 978-0-13-063085-8.
- ^ Radford (1945)
- ^ "Mackerel Economics in Prison Leads to Appreciation for Oily Fillets: Packs of Fish Catch On as Currency, Former Inmates Say; Officials Carp". The Wall Street Journal. October 2, 2008.
- ^ Oconnor, Ashling (June 16, 2007). "Coins run out as smugglers turn rupees into razors". The Times. London. Retrieved April 30, 2010.
- ^ Rothbard, Murray, Commodity Money in Colonial America, LewRockwell.com
- ^ "The Fur Trade and Hudson's Bay Company". Archived from the original on 2015-01-08. Retrieved 2015-01-05.
- ^ "Troublesome in Europe: Black Markets". Leader-Post. Regina, Saskatchewan. 1946-01-05. Retrieved 2012-11-28.
- ^ Charles F. Horne, PhD (1915). "The Code of Hammurabi : Introduction". Yale University. Retrieved December 8, 2015.
- ^ Dow, Sheila C. (2005). "Axioms and Babylonian thought: a reply". Journal of Post Keynesian Economics. 27 (3): 385–91.
- ^ 31 U.S.C. § 5103
Last edited on 7 April 2021, at 05:14
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