What Is Commodity Money? Definition and Examples
Understand commodity money: how its value comes from the material itself, not decree. Explore its fundamental nature and historical function.
Commodity money is a form of currency whose worth comes directly from the material it is made of, rather than from government declaration or a promise. This article explores the nature of commodity money, its essential properties, and its historical and contemporary examples.
What Defines Commodity Money
Commodity money holds intrinsic value, meaning its worth comes from the commodity itself, not from government decree or trust in an issuing authority. The item used as money has a use or worth beyond its function as a medium of exchange. For example, gold used as money also has value for jewelry or industrial applications.
The value of commodity money is established by the market dynamics of supply and demand for the physical good, not by a government. This intrinsic value provides perceived stability and reliability. Historically, commodity money emerged from barter systems, where people began to use certain goods with intrinsic value to facilitate trade more efficiently. This form of money acts as a medium of exchange, simplifying transactions compared to direct bartering, which often requires a “double coincidence of wants.”
Essential Characteristics of Commodity Money
For a commodity to function effectively as money, it possesses several key characteristics. Durability is a primary attribute, ensuring money can withstand wear and tear without losing its value. Precious metals like gold and silver are highly durable as they resist rust and corrosion. Conversely, perishable goods are less suitable because they deteriorate quickly.
Portability refers to the ease of carrying and moving the commodity, allowing for convenient transactions. Divisibility means the commodity can be broken down into smaller units without losing proportional value. Gold and silver can be melted and re-coined, while items like salt can be easily portioned.
Uniformity, also known as fungibility, ensures that each unit of the commodity is interchangeable with any other of the same type and value. This simplifies exchange. Scarcity is a factor, meaning the commodity is not easily found or created in abundance; a limited supply helps maintain its value and prevents inflation. Widespread acceptability means people trust the commodity and are willing to receive it in exchange for goods and services due to its inherent utility or desirability.
Historical and Contemporary Examples
Throughout history, diverse commodities have served as money, reflecting their inherent value and utility. Gold and silver are prominent examples, widely used across civilizations due to their scarcity, durability, and divisibility. They are also used in jewelry, electronics, and industrial applications. Ancient civilizations like the Mesopotamians and Egyptians used gold and silver.
Salt was another significant form of commodity money, particularly where it was scarce but essential for food preservation. Roman soldiers were sometimes paid in salt, giving rise to the word “salary.” In parts of Africa, salt was used as currency and traded for gold between the 7th and 14th centuries AD.
Cowrie shells were used as currency in parts of Africa, Asia, and the Pacific islands. Their portability, durability, and difficulty to counterfeit made them suitable. Ancient China even incorporated the cowrie character into their symbols for money. Cacao beans also functioned as money in ancient Mesoamerican cultures, including the Mayans and Aztecs. Valued for chocolate, these beans could purchase goods and services, with values varying by freshness.
In recent times, certain goods have functioned as commodity money during economic instability or in closed systems. Items with intrinsic value often emerge as a medium of exchange. For example, cigarettes were used in prisoner-of-war camps, where they were accepted for their utility and trade value. After World War II, cigarettes and gasoline also served as currency in parts of Europe experiencing monetary collapse. These examples highlight how commodity money influences exchange when traditional currencies falter.