Commodity money

Commodity money

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Commodity money is money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

 whose value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...

 comes from a commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....

 out of which it is made. It is objects that have value in themselves as well as for use as money.

Examples of commodities that have been used as mediums of exchange
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...

 include gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...

, silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...

, copper
Copper
Copper is a chemical element with the symbol Cu and atomic number 29. It is a ductile metal with very high thermal and electrical conductivity. Pure copper is soft and malleable; an exposed surface has a reddish-orange tarnish...

, peppercorns
Black pepper
Black pepper is a flowering vine in the family Piperaceae, cultivated for its fruit, which is usually dried and used as a spice and seasoning. The fruit, known as a peppercorn when dried, is approximately in diameter, dark red when fully mature, and, like all drupes, contains a single seed...

, large stones (such as Rai stones
Rai stones
Rai, or stone money, are large, circular stone disks carved out of limestone formed from aragonite and calcite crystals, Rai stones were mined in Palau and transported for use to the island of Yap, Micronesia...

), decorated belts
Belt (clothing)
A belt is a flexible band or strap, typically made of leather or heavy cloth, and worn around the waist. A belt supports trousers or other articles of clothing.-History:...

, shells
Seashell
A seashell or sea shell, also known simply as a shell, is a hard, protective outer layer created by an animal that lives in the sea. The shell is part of the body of the animal. Empty seashells are often found washed up on beaches by beachcombers...

, alcohol
Alcohol
In chemistry, an alcohol is an organic compound in which the hydroxy functional group is bound to a carbon atom. In particular, this carbon center should be saturated, having single bonds to three other atoms....

, cigarette
Cigarette
A cigarette is a small roll of finely cut tobacco leaves wrapped in a cylinder of thin paper for smoking. The cigarette is ignited at one end and allowed to smoulder; its smoke is inhaled from the other end, which is held in or to the mouth and in some cases a cigarette holder may be used as well...

s, cannabis
Cannabis
Cannabis is a genus of flowering plants that includes three putative species, Cannabis sativa, Cannabis indica, and Cannabis ruderalis. These three taxa are indigenous to Central Asia, and South Asia. Cannabis has long been used for fibre , for seed and seed oils, for medicinal purposes, and as a...

, candy
Candy
Candy, specifically sugar candy, is a confection made from a concentrated solution of sugar in water, to which flavorings and colorants are added...

, barley
Barley
Barley is a major cereal grain, a member of the grass family. It serves as a major animal fodder, as a base malt for beer and certain distilled beverages, and as a component of various health foods...

 etc. These items were sometimes used in a metric of perceived value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...

 in conjunction to one another, in various commodity valuation or price system
Price system
In economics, a price system is any economic system that affects its distribution of goods and services with prices and employing any form of money. Except for possible remote and primitive communities, all modern societies use price systems to allocate resources...

 economies.

Aspects


Commodity money is to be distinguished from representative money
Representative money
The term representative money has been used variously to mean:*a claim on a commodity, for example gold certificates or silver certificates. In this sense it may be called 'commodity-backed money'....

 which is a certificate or token which can be exchanged for the underlying commodity, but only as the trade is good for that source and the product. A key feature of commodity money is that the value is directly perceived by the users of this money, who recognize the utility or beauty of the tokens as they would recognize the goods themselves. That is, the effect of holding a token for a barrel of oil must be the same economically as actually having the barrel at hand. This thinking guides the modern commodity markets, although they use a sophisticated range of financial instruments that are more than one-to-one representations of units of a given type of commodity.

Since payment by commodity generally provides a useful good, commodity money is similar to barter
Barter
Barter is a method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is usually bilateral, but may be multilateral, and usually exists parallel to monetary systems in most developed countries, though to a...

, but is distinguishable from it in having a single recognized unit of exchange. described the establishment of commodity money in P.O.W camps
Radford documented the way that this 'cigarette currency' was subject to Gresham's law
Gresham's Law
Gresham's law is an economic principle that states: "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation." It is commonly...

, inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...

, and especially deflation.

In another example, in U.S. prisons, after smoking was banned in about 2003, commodity money has switched in many places to cans or foil pouches 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 personal possession of currency is prohibited.

Metals


In situations where the commodity is metal, typically gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...

 or silver
Silver
Silver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...

, a government mint
Mint (coin)
A mint is an industrial facility which manufactures coins for currency.The history of mints correlates closely with the history of coins. One difference is that the history of the mint is usually closely tied to the political situation of an era...

 will often coin
Coin
A coin is a piece of hard material that is standardized in weight, is produced in large quantities in order to facilitate trade, and primarily can be used as a legal tender token for commerce in the designated country, region, or territory....

 money by placing a mark on the metal that serves as a guarantee of the weight and purity of the metal. In doing so, the government will often impose a fee which is known as seigniorage
Seigniorage
Seigniorage can have the following two meanings:* Seigniorage derived from specie—metal coins, is a tax, added to the total price of a coin , that a customer of the mint had to pay to the mint, and that was sent to the sovereign of the political area.* Seigniorage derived from notes is more...

.

The role of a mint and of coin differs between commodity money and fiat money
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...

. In situations where there is a 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 Rupee
Rupee
The rupee is the common name for the monetary unit of account in India, Sri Lanka, Nepal, Pakistan, Mauritius, Seychelles, Maldives, and formerly in Burma, and Afghanistan. Historically, the first currency called "rupee" was introduced in the 16th century...

s 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 U.S., the metal in pennies (mostly zinc since 1982) and the metal in nickels (75% copper, 25% nickel) has a value close to (and at some times exceeding) the fiat face value of the coin.

History


Commodities often come into being in situations where other forms of money are not available or not trusted.
Various commodities were used in pre-Revolutionary America including wampum
Wampum
Wampum are traditional, sacred shell beads of the Eastern Woodlands tribes of the indigenous people of North America. Wampum include the white shell beads fashioned from the North Atlantic channeled whelk shell; and the white and purple beads made from the quahog, or Western North Atlantic...

, maize
Maize
Maize known in many English-speaking countries as corn or mielie/mealie, is a grain domesticated by indigenous peoples in Mesoamerica in prehistoric times. The leafy stalk produces ears which contain seeds called kernels. Though technically a grain, maize kernels are used in cooking as a vegetable...

, iron nails, beaver pelts, and tobacco
Tobacco
Tobacco is an agricultural product processed from the leaves of plants in the genus Nicotiana. It can be consumed, used as a pesticide and, in the form of nicotine tartrate, used in some medicines...

. According to economist Murray Rothbard
Murray Rothbard
Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...

:


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.


The Fort Knox
Fort Knox
Fort Knox is a United States Army post in Kentucky south of Louisville and north of Elizabethtown. The base covers parts of Bullitt, Hardin, and Meade counties. It currently holds the Army Human Resources Center of Excellence to include the Army Human Resources Command, United States Army Cadet...

 gold repository long maintained by the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, functioned as a theoretical backing for federally issued "gold certificates" to substitute for the gold. Between 1933 and 1970 (when the U.S. officially left the gold standard), one U.S. dollar
United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....

 was technically worth exactly 1/35 of a troy ounce
Troy weight
Troy weight is a system of units of mass customarily used for precious metals, gemstones, and black powder.There are 12 troy ounces per troy pound, rather than the 16 ounces per pound found in the more common avoirdupois system. The troy ounce is 480 grains, compared with the avoirdupois ounce,...

 (889 mg) of gold. However, actual trade in gold bullion as a precious metal
Precious metal
A precious metal is a rare, naturally occurring metallic chemical element of high economic value.Chemically, the precious metals are less reactive than most elements, have high lustre, are softer or more ductile, and have higher melting points than other metals...

 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 influential economists. 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
Paper Money
Paper Money is the second album by the band Montrose. It was released in 1974 and was the band's last album to feature Sammy Hagar as lead vocalist.-History:...

 that purported to be as good as gold.

In post-war Germany, cigarettes became used as a form of commodity money in some areas. Cigarettes are still used as a form of commodity money in U.S. prisons ( concludes that where jails don't ban them, the prison "gray market" creates a largely benign use of the cigarette as "currency").

Functions of commodity money



Although some commodity money (barley
Barley
Barley is a major cereal grain, a member of the grass family. It serves as a major animal fodder, as a base malt for beer and certain distilled beverages, and as a component of various health foods...

), has been used historically in relations of trade and barter (Mesopotamia
Mesopotamia
Mesopotamia is a toponym for the area of the Tigris–Euphrates river system, largely corresponding to modern-day Iraq, northeastern Syria, southeastern Turkey and southwestern Iran.Widely considered to be the cradle of civilization, Bronze Age Mesopotamia included Sumer and the...

 circa 3000 BC.), it can be inconvenient to use as a medium of exchange
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...

 or a standard of deferred payment
Standard of deferred payment
A standard of deferred payment is the accepted way, in a given market, to settle a debt – a unit in which debts are denominated. It is one of the defining functions of money; for example, while the gold standard reigned, gold or any currency convertible to gold at a fixed rate constituted such a...

 due to transport and storage concerns, and eventual rancidity. Gold or other metals are sometimes used in a price system
Price system
In economics, a price system is any economic system that affects its distribution of goods and services with prices and employing any form of money. Except for possible remote and primitive communities, all modern societies use price systems to allocate resources...

 as a store of perceived value, that does not break down due to environmental deterioration, and can be easily stored (demurrage
Demurrage (currency)
Demurrage is a cost associated with owning or holding currency over a given period of time. It is sometimes referred to as a carrying cost of money. For commodity money such as gold, demurrage is in practice nothing more than the cost of storing and securing the gold...

).

The use of barter
Barter
Barter is a method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money. It is usually bilateral, but may be multilateral, and usually exists parallel to monetary systems in most developed countries, though to a...

 like methods using commodity money may date back to at least 100,000 years ago. Trading in red ochre is attested in Swaziland
Swaziland
Swaziland, officially the Kingdom of Swaziland , and sometimes called Ngwane or Swatini, is a landlocked country in Southern Africa, bordered to the north, south and west by South Africa, and to the east by Mozambique...

, 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
Reciprocity (cultural anthropology)
In cultural anthropology and sociology, reciprocity is a way of defining people's informal exchange of goods and labour; that is, people's informal economic systems. It is the basis of most non-market economies. Since virtually all humans live in some kind of society and have at least a few...

, and/or redistribution, substituted for market exchange.

The city-state
City-state
A city-state is an independent or autonomous entity whose territory consists of a city which is not administered as a part of another local government.-Historical city-states:...

s of Sumer
Sumer
Sumer was a civilization and historical region in southern Mesopotamia, modern Iraq during the Chalcolithic and Early Bronze Age....

 developed a trade and market economy
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...

 based originally on the commodity money of the Shekel
Shekel
Shekel , is any of several ancient units of weight or of currency. The first usage is from Mesopotamia around 3000 BC. Initially, it may have referred to a weight of barley...

 which was a certain weight measure of barley, while the Babylonia
Babylonia
Babylonia was an ancient cultural region in central-southern Mesopotamia , with Babylon as its capital. Babylonia emerged as a major power when Hammurabi Babylonia was an ancient cultural region in central-southern Mesopotamia (present-day Iraq), with Babylon as its capital. Babylonia emerged as...

ns and their city state neighbors later developed the earliest system of economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 using a metric of various commodities, that was fixed in a legal code.

Several centuries after the invention of cuneiform, 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 fines

Legal tender issues and commodity money


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 legal tender. The value of the precious metal in the coin may give it another value, but this varies over time, its value 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 can not be sued by the payor 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.

See also

  • Commodity currency
    Commodity currency
    A commodity currency is a name given to currencies of countries which depend heavily on the export of certain raw materials for income. These countries are typically developing countries, eg...

  • Digital gold currency
    Digital gold currency
    Digital gold currency is a form of electronic money based on ounces of gold. It is a kind of representative money, like a US paper gold certificate at the time that these were exchangeable for gold on demand. The typical unit of account for such currency is the gold gram or the troy ounce,...

  • Fiat money
    Fiat money
    Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...

  • Gresham's law
    Gresham's Law
    Gresham's law is an economic principle that states: "When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation." It is commonly...

  • History of money
    History of money
    The history of money spans thousands of years. Numismatics is the scientific study of money and its history in all its varied forms.Many items have been used as commodity money such as natural scarce precious metals, cowry shells, barley, beads etc., as well as many other things that are thought of...

  • Private currency
    Private currency
    A private currency is a currency issued by a private organization. It is often contrasted with fiat currency issued by governments or central banks. In many countries, the issue of private paper currencies is severely restricted by law....

  • Representative money
    Representative money
    The term representative money has been used variously to mean:*a claim on a commodity, for example gold certificates or silver certificates. In this sense it may be called 'commodity-backed money'....

  • Terra

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