Commodity money

Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects that have value in themselves (intrinsic value) as well as value in their use as money.[1]

Examples of commodities that have been used as mediums of exchange include gold, silver, copper, salt, peppercorns, tea, large stones (such as Rai stones), decorated belts, shells, alcohol, cigarettes, cannabis, silk, candy, nails, cocoa beans, cowries and barley. These items were sometimes used in a metric of perceived value in conjunction to one another, in various commodity valuation or price system economies.

Axes-like grzywnas (commodity money) from Kostkowice, Poland, 9-mid X Century AD
Axe-like grzywnas (commodity money) from Kostkowice, Poland, 9th to mid-10th century AD
An okpoho or manilla, the traditional commodity money in West Africa until the 1940s.


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 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, 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.[2]

Radford documented the way that this 'cigarette currency' was subject to Gresham's law, inflation, and especially deflation.

In another example, in US prisons, after smoking was banned circa 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.[3]


In situations where the commodity is metal, typically gold or silver, a government mint will often coin 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.

The role of a mint and of coin differs between commodity money and fiat money. In situations where there is 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.[4] 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.


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, maize, 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.[5]

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 a primitive economy with limited supplies of gold, silver, and other kinds of money, but numerous fur-bearing animals.[6]

The Fort Knox gold repository long maintained by the United States, 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 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 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 that purported to be as good as gold.

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.[7] Cigarettes are still used as a form of commodity money in U.S. prisons (Lankenau 2001, p. 142 concludes that where jails don't ban them, the prison "gray market" creates a use of the cigarette as "currency").


Japan commodity money before the 8th century
Japanese commodity money before the 8th century AD: arrowheads, rice grains and gold powder. This is the earliest form of Japanese currency.

Although some commodity money (barley) has been used historically in relations of trade and barter (Mesopotamia circa 3000 BC), it can be inconvenient to use as a medium of exchange or a standard of deferred payment due to transport and storage concerns, and eventual rancidity. Gold or other metals are sometimes used in a price system as a store of perceived value that does not break down due to environmental deterioration and that can be easily stored (demurrage).

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.

The city-states of Sumer 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.[8]

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 fines.[9]

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,[10] so that a seller who refuses to accept them cannot 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



  1. ^ O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 246. ISBN 0-13-063085-3.
  2. ^ Radford, R.A. (1945). "The Economic Organisation of a PoW Camp". Economica. Archived from the original on 2008-07-17. Retrieved 2009-05-09..
  3. ^ "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.
  4. ^ Oconnor, Ashling (June 16, 2007). "Coins run out as smugglers turn rupees into razors". The Times. London. Retrieved April 30, 2010.
  5. ^ Rothbard, Murray, Commodity Money in Colonial America,
  6. ^ "The Fur Trade and Hudson's Bay Company". Archived from the original on 2015-01-08. Retrieved 2015-01-05.
  7. ^ "Troublesome in Europe: Black Markets". Leader-Post. Regina, Saskatchewan. 1946-01-05. Retrieved 2012-11-28.
  8. ^ Charles F. Horne, Ph.D. (1915). "The Code of Hammurabi : Introduction". Yale University. Retrieved December 8, 2015.
  9. ^ Dow, Sheila C. (2005). "Axioms and Babylonian thought: a reply". Journal of Post Keynesian Economics. 27 (3): 385–91.
  10. ^ 31 U.S.C. § 5103


External links


Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies must be exchanged.

Credit theory of money

Credit theories of money (also called debt theories of money) are monetary economic theories concerning the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and credit/debt are the same thing, seen from different points of view. Proponents assert that the essential nature of money is credit (debt), at least in eras where money is not backed by a commodity such as gold. Two common strands of thought within these theories are the idea that money originated as a unit of account for debt, and the position that money creation involves the simultaneous creation of debt. Some proponents of credit theories of money argue that money is best understood as debt even in systems often understood as using commodity money. Others hold that money equates to credit only in a system based on fiat money, where they argue that all forms of money including cash can be considered as forms of credit money.

The first formal Credit theory of money arose in the 19th century. Anthropologist David Graeber has argued that for most of human history, money has been widely understood to represent debt, though he concedes that even prior to the modern era, there have been several periods where rival theories like Metallism have held sway.


Debasement is the practice of lowering the value of currency. It is particularly used in connection with commodity money such as gold or silver coins. A coin is said to be debased if the quantity of gold, silver, copper or nickel is reduced.

Demurrage (currency)

Demurrage is the cost associated with owning or holding currency over a given period. It is sometimes referred to as a carrying cost of money. For commodity money such as gold, demurrage is the cost of storing and securing the gold. For paper currency, it can take the form of a periodic tax, such as a stamp tax, on currency holdings. Demurrage is sometimes cited as economically advantageous, usually in the context of complementary currency systems.

Economic secession

Economic secession has been variously defined by sources. In its narrowest sense, it is abstention from the state’s economic system – for instance by replacing the use of government money with barter, Local Exchange Trading Systems, or commodity money (such as gold). Wendell Berry may have coined the term "economic secession." He promoted his own version in his 1991 essay Conservation and Local Economy. John T. Kennedy used the term to refer to all human action that is forbidden by the State; he explains economic secession as tax avoidance or refusal to follow regulations as a method to reduce government control.

Samuel Edward Konkin III used the term "counter-economics" to refer to a similar concept.Economic secession takes government out of the equation when making economic decisions. Trading happens through payment in-kind, cash and barter.Economic secession is a way for the individuals to withdraw their wealth for both economic and political reasons. If individuals disagree with the use of tax money to fund a political agenda, they use economic secession as a means of privately protesting the control of government in their lives. The opinion that government is too involved in society fuels individuals to withdraw economically and view their withdrawal from the government system as a moral stand.

Fiat money

Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value. It was introduced as an alternative to commodity money and representative money. Commodity money is created from a good, often a precious metal such as gold or silver, which has uses other than as a medium of exchange (such a good is called a commodity). Representative money is similar to fiat money, but it represents a claim on a commodity (which can be redeemed to a greater or lesser extent).Fiat money first began to be used in China in the 11th century. Since then, it has been used by various countries, usually concurrently with commodity currencies. Fiat money started to dominate in the 20th century. Since the decoupling of the US dollar from gold by Richard Nixon in 1971, a system of national fiat currencies has been used globally.

Fiat money has been defined variously as:

Any money declared by a government to be legal tender.

State-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.

Intrinsically valueless money used as money because of government decree.

An intrinsically useless object that serves as a medium of exchange (also known as fiduciary money.)The term fiat derives from the Latin fiat ("let it be done") used in the sense of an order, decree or resolution.

Grzywna (unit)

The grzywna (Polish: [ˈɡʐɨvna]) was a measure of weight, mainly for silver, commonly used throughout medieval central and eastern Europe, particularly in the Kingdom of Poland and Kingdom of Bohemia (Czech: hřivna).

Grzywna was also a unit of measure of a unit of exchange, and as such used as money in the 10th–15th centuries. Silver ingots acted as commodity money before the widespread use of minted coins. Several different grzywnas developed with their own system of weight and exchange, such as the Kulm grzywna and the Kraków grzywna.

History of money

The history of money concerns the development of social systems that provide at least one of the functions of money. Such systems can be understood as means of trading wealth indirectly; not directly as with barter. Money is a mechanism that facilitates this process.

Money may take a physical form as in coins and notes, or may exist as a written or electronic account. It may have intrinsic value (commodity money), be legally exchangeable for something with intrinsic value (representative money), or only have nominal value (fiat money).

Intrinsic value (numismatics)

In commodity money, intrinsic value can be partially or entirely due to the desirable features of the object as a medium of exchange and a store of value. Examples of such features include divisibility; easily and securely storable and transportable; scarcity; and difficulty to counterfeit. When objects come to be used as a medium of exchange they lower the high transaction costs associated with barter and other in-kind transactions.

In numismatics, intrinsic value, also known as melt value, is the value of the metal, typically a precious metal, in a coin. For example, if gold trades in commercial markets at a price of US$ 1200 per fine troy ounce, then a coin minted from one troy ounce of fine gold would have an intrinsic value of US$ 1200.

When a coin is in use as money and the intrinsic value becomes greater than the face value, these coins are in danger of being removed from circulation in large numbers (an expression of Gresham's law). When copper prices skyrocketed in the mid-to-late 1970s, there was a fear that the U.S. one-cent piece might succumb to this fate, leading the Mint to change the composition of the cent in 1982.

Japanese currency

Japanese currency has a history covering the period from the 8th century to the present. After the traditional usage of rice as currency medium, Japan's currency was characterized by an early adoption of currency systems and designs from China before developing a separate system of its own.

Knife money

Knife money is the name of large, cast, bronze, knife-shaped commodity money produced by various governments and kingdoms in what is now China, approximately 2500 years ago. Knife money circulated in China between 600 and 200 B.C. during the Zhou dynasty.

Medium of exchange

Medium of exchange is one of the three fundamental functions of money in mainstream economics. It is a widely accepted token which can be exchanged for goods and services. Because it can be exchanged for any good or service it acts as an intermediary instrument and avoids the limitations of barter; where what one wants has to be exactly matched with what the other has to offer.Most forms of money can act as mediums of exchange including commodity money, representative money and most commonly fiat money. Representative and fiat money often exist in digital form as well as physical tokens such as coins and notes.

Monetary reform

Monetary reform is any movement or theory that proposes a system of supplying money and financing the economy that is different from the current system.Monetary reformers may advocate any of the following, among other proposals:

A return to the gold standard (or silver standard or bimetallism).Abolition of central bank support of the banking system during periods of crisis and the enforcement of full reserve banking for the privately owned banking system to remove the possibility of bank runs, possibly combined with sovereign money issued and controlled by the government or a central bank under the direction of the government. There is an associated debate within Austrian School whether free banking or full reserve banking should be advocated but regardless Austrian School economists such as Murray Rothbard support ending central bank bail outs ("ending the Fed").The issuance of interest-free credit by a government-controlled and fully owned central bank. Such interest-free but repayable loans could be used for public infrastructure and productive private investment. This proposal seeks to avoid debt-free money causing inflation.

The issuance of social credit – "debt-free" or "pure" money issued directly from the Treasury – rather than the sourcing of fresh money from a central bank in the form of interest-bearing bonds. These direct cash payments would be made to "replenish" or compensate people for the net losses some monetary reformers believe they suffer in a fractional reserve-based monetary system.

Monetary system

A monetary system is the set of institutions by which a government provides money in a country's economy. Modern monetary systems usually consist of the national treasury, the mint, the central banks and commercial banks.


Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular 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 sometimes, a standard of deferred payment. Any item or verifiable record that fulfils these functions can be considered as money.

Money is historically an emergent market phenomenon establishing a commodity money, but nearly all contemporary money systems are based on fiat money. Fiat money, like any check or note of debt, is without use value as a physical commodity. It derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private". Counterfeit money can cause good money to lose its value.

The money supply of a country consists of currency (banknotes and coins) and, depending on the particular definition used, one or more types of bank money (the balances held in checking accounts, savings accounts, and other types of bank accounts). Bank money, which consists only of records (mostly computerized in modern banking), forms by far the largest part of broad money in developed countries.

Purchasing power

Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would be the case today, indicating that the currency had a greater purchasing power in the 1950s. Currency can be either a commodity money, like gold, silver and bitcoin, or fiat money emitted by government sanctioned agencies.

Shell money

Shell money is a medium of exchange similar to coin money and other forms of commodity money, and was once commonly used in many parts of the world. Shell money usually consisted either of whole sea shells or pieces of them, which were often worked into beads or were otherwise artificially shaped. The use of shells in trade began as direct commodity exchange, the shells having value as body ornamentation. The distinction between beads as commodities and beads as money has been the subject of debate among economic anthropologists.Some form of shell money appears to have been found on almost every continent populated by humans: America, Asia, Africa and Australia. The shell most widely used worldwide as currency was the shell of Cypraea moneta, the money cowry. This species is most abundant in the Indian Ocean, and was collected in the Maldive Islands, in Sri Lanka, along the Malabar coast, in Borneo and on other East Indian islands, and in various parts of the African coast from Ras Hafun to Mozambique. Cowry shell money was an important part of the trade networks of Africa, South Asia, and East Asia.


Specie may refer to:

Coins or other metal money in mass circulation

Bullion coins

Hard money (policy)

Commodity money

Specie Circular, 1836 executive order by US President Andrew Jackson regarding hard money

Specie Payment Resumption Act

The Theory of Money and Credit

The Theory of Money and Credit is a 1912 economics book written by Ludwig von Mises, originally published in German as Theorie des Geldes und der Umlaufsmittel. In it Mises expounds on his theory of the origins of money through his "regression theorem", which is based on logical argumentation, not historic explanations. It is one of the foundational works of the Misean branch of the Austrian School of economic thought.

Commodity money exists today. Mises looks at the origin, nature and value of money, and its effect on determining monetary policy. It does not concern all adaptations of money. He uses the so-called regression theorem, a statement backed by a step by step, logical reasoning. Mises explains why money is demanded in its own right. According to Mises, money has historically come about after there has been a demand for the money commodity in a barter economy.

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