View source for Commodity money

{{Short description|Money with value derived from composition from a commodity (such as silver or gold coins)}}[[File:Axes-like grzywnas (commodity money) from Kostkowice, Poland, 9-mid X Century AD.jpg|thumb|Axe-like [[Grzywna (unit)|grzywnas]] (commodity money) from Kostkowice, Poland, 9th to mid-10th century AD]]
[[Image:Manillaokhapo.JPG|thumb|An ''okpoho'' or [[manillas|manilla]], the traditional commodity money in [[West Africa]] until the 1940s.]]
'''Commodity money''' is [[money]] whose [[Value (economics)|value]] comes from a [[commodity]] of which it is made. Commodity money consists of objects that have value in themselves ([[Intrinsic value (numismatics)|intrinsic value]]) as well as value in their use as money.<ref>{{cite book
  | last = O'Sullivan
  | first = Arthur
  | authorlink = Arthur O'Sullivan (economist)
  |author2=Steven M. Sheffrin
  | title = Economics: Principles in action
  | publisher = Pearson Prentice Hall
  | year = 2003
  | location = Upper Saddle River, New Jersey 07458
  | pages = 246
  | url = http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4
  | doi =
  | id =
  | isbn = 978-0-13-063085-8}}</ref>

Examples of commodities that have been used as [[medium of exchange|mediums of exchange]] include [[gold]], [[silver]], [[copper]], [[history of salt|salt]], [[Black pepper|peppercorns]], [[Tea brick#Use as currency|tea]], large stones (such as [[Rai stones]]), decorated [[Belt (clothing)|belts]], [[Shell money|shells]], [[alcohol (drug)|alcohol]], [[cigarette]]s, [[cannabis (drug)|cannabis]], [[silk]], [[candy]], [[nail_(fastener)|nail]]s, [[cocoa beans]], [[cowries]] and [[barley]]. These items were sometimes used in a [[Metric (unit)|metric]] of perceived [[value (economics)|value]] in conjunction to one another, in various commodity [[Valuation (finance)|valuation]] or [[price system]] economies.

==Aspects==
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 market]]s, although they use a sophisticated range of [[financial instrument]]s 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. {{Harv | Radford | 1945}} described the establishment of commodity money in [[Prisoner-of-war camp#World War II|P.O.W camp]]s.

{{Quote |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.<ref>{{Cite journal | first = R.A. | last = Radford | url = http://www.albany.edu/~mirer/eco110/pow.html | archive-url = https://web.archive.org/web/20080717062228/http://www.albany.edu/~mirer/eco110/pow.html | dead-url = yes | archive-date = 2008-07-17 | title = The Economic Organisation of a PoW Camp | journal = [[Economica]] | volume = 12 | issue = 48 | pages = 189 | year = 1945 | accessdate = 2009-05-09| doi = 10.2307/2550133 | jstor = 2550133 }}.</ref>}}

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.<ref>{{cite news |url = https://www.wsj.com/articles/SB122290720439096481 |newspaper= The Wall Street Journal |date= October 2, 2008 | title = Mackerel Economics in Prison Leads to Appreciation for Oily Fillets: Packs of Fish Catch On as Currency, Former Inmates Say; Officials Carp}}</ref>

===Metals===
{{Further|gold coin|silver coin|gold standard}}

In situations where the commodity is metal, typically [[gold]] or [[silver]], a government [[mint (coin)|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 [[Rupee]]s disappeared from the market after 2007 when their content of stainless steel became larger than the fiat or face value of the coins.<ref>{{cite news| url=http://www.timesonline.co.uk/tol/news/world/asia/article1940319.ece | work=The Times | location = London | title=Coins run out as smugglers turn rupees into razors | first=Ashling | last=Oconnor | date=June 16, 2007 | accessdate =April 30, 2010}}</ref> 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.

==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]], [[maize]], iron nails, beaver pelts, and [[tobacco]]. According to economist [[Murray Rothbard]]:

<blockquote>
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.<ref>[[Murray Rothbard|Rothbard, Murray]], [http://archive.lewrockwell.com/rothbard/rothbard260.html Commodity Money in Colonial America], ''[[LewRockwell.com]]''</ref>
</blockquote>

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.<ref>{{cite web |title=The Fur Trade and Hudson's Bay Company |url=http://www.canadiana.ca/hbc/stories/produits2_e.html# |accessdate=2015-01-05 |deadurl=yes |archiveurl=https://web.archive.org/web/20150108074343/http://www.canadiana.ca/hbc/stories/produits2_e.html |archivedate=2015-01-08 |df= }}</ref>

The [[United States Bullion Depository|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 [[United States dollar|U.S. dollar]] was technically worth exactly 1/35 of a [[Troy weight|troy ounce]] (889&nbsp;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]].<ref>{{cite news |title=Troublesome in Europe: Black Markets |newspaper=[[Leader-Post]] |location=[[Regina, Saskatchewan]] |date=1946-01-05 |url=https://news.google.com/newspapers?id=YL9TAAAAIBAJ&sjid=gzgNAAAAIBAJ&pg=5535%2C527446 |accessdate = 2012-11-28}}</ref> Cigarettes are still used as a form of commodity money in U.S. prisons ({{Harvnb | Lankenau | 2001 | p=142}} concludes that where jails don't ban them, the prison "gray market" creates a use of the cigarette as "currency").

==Functions==
[[File:Japan commodity money before the 8th century.jpg|thumb|300px|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 (currency)|demurrage]]).

The use of [[barter]] like methods using commodity money may date back to at least 100,000 years ago.{{fact|date=June 2017}} 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 (cultural anthropology)|reciprocity]], and/or redistribution, substituted for market exchange.{{Citation needed|date=August 2008}}

The [[city-state]]s 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 [[Babylonia]]ns 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.<ref name="yale2">{{Cite web|url=http://avalon.law.yale.edu/ancient/hammint.asp |title=The Code of Hammurabi : Introduction |accessdate=December 8, 2015 |publisher=Yale University|year=1915|author=Charles F. Horne, Ph.D.}}</ref>

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.<ref name=Sheila>{{cite journal | last1 = Dow | first1 = Sheila C. | year = 2005 | title = Axioms and Babylonian thought: a reply | url = | journal = Journal of Post Keynesian Economics | volume = 27 | issue = 3| pages = 385–91 }}</ref>

==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,<ref>{{usc|31|5103}}</ref> 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==
* [[Bullion coin]]
* [[Debasement]]
* [[Digital gold currency]]
* [[Hawala]]
* [[History of money]]
* [[Metallism]]
* [[Private currency]]
* [[Shell money]]

==References==

===Footnotes===
{{Reflist}}

===Notations===
* {{Cite journal | last = Lankenau | first = S.E. | title = Smoke 'Em If You Got 'Em: Cigarette Black Markets in U.S. Prisons and Jails | year = 2001 | journal = The Prison Journal | pmid = 18064295 | url = http://tpj.sagepub.com/cgi/content/abstract/81/2/142 | pmc = 2117377 | pages =142–161 | doi = 10.1177/0032885501081002002 | issue = 2 | volume = 81 | ref = harv | postscript = <!--None-->}}
* {{Cite journal | last = Radford | first = R. A. | title = The Economic Organisation of a P.O.W Camp | journal = Economica | volume = 12 | issue = 48 | pages = 189–201  | date = November 1945 | doi = 10.2307/2550133 | ref = harv | postscript = <!--None--> | jstor = 2550133}}

==External links==
* [http://www.coins.nd.edu/ColCoin/ColCoinIntros/Commodity.intro.html Commodity Money: Introduction], about commodity money in the early American colonies.
* [http://ingrimayne.com/econ/Money/Commodities.html Commodities], a summary.
* [https://web.archive.org/web/20070614014529/https://www.egwald.com/ubcstudent/aboriginal/exchanges.php Linguistic and Commodity Exchanges] Examines the structural differences between barter and monetary commodity exchanges and oral and written linguistic exchanges.

{{Means of Exchange}}

{{DEFAULTSORT:Commodity Money}}
[[Category:Commodities]]
[[Category:Metallism]]
[[Category:Money]]
[[Category:Simple living]]