What is Commodity Money? with pictures


Here is how the Kurdish area of northern Iraq, during the period between the Gulf War in 1991 and the fall of Saddam Hussein in 2003, came to have its own currency, despite the pronouncement of its prime minister to the contrary. Mackerel in federal prisons is an example of commodity money. Mackerel could be used to buy services from other prisoners; they could also be eaten. We saw in the chapter that introduced the concept of inflation that inflation reduces the value of money. In periods of rapid inflation, people may not want to rely on money as a store of value, and they may turn to commodities such as land or gold instead.

Historically, other forms of money were used that did have an underlying value, such as foods, fuels, or metals. Such commodities are not widely used in modern economies as their underlying value can vary immensely from their agreed currency value. There is also the problem that many of these items are prone to spoiling or deteriorating. Though not similar to traditional commodities, money finds its value in the foundational economic concepts of supply and demand.

What Is Backwardation? – Forbes

What Is Backwardation?.

Posted: Wed, 08 Feb 2023 08:00:00 GMT [source]

People have accepted cigarettes and tobacco in lieu of money as a form of payment. The ‘intrinsic value’ of commodity is a crucial part of building its trust. We can look back many centuries to when goods such as tobacco or salt were used as money. People would use them to trade with each other as they were commonly used goods.

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In a society where the commodity money. of money is crumbling and everyone carries unserviceable debt, the edge is already near. When societies choose to utilize such commodity money as metal coins for their official legal tender, it is up to the government in question to determine the fixed value of each coin in the currency lineup. The face value of these coins is the one that will be accepted rather than the value of the metal contained within each piece.

The creation of units of measurements such as ounces and pounds paved the way for such. As a result, we are able to purchase different goods at different prices. If we cannot measure money, we cannot measure how much we are willing to pay. If there was only a $50 note in circulation; it makes it incredibly difficult to buy something at $1. Commodities such as meat would not be effective as they go bad over time.


We have already seen what money is and why people trust it, but let’s dive in and see what characteristics it has. During this period, Lydian merchants produced a gold coin mixed with silver; otherwise known as electrum. Their aim was to help improve the efficiency of trading between countries.

Coin Reconsidered: The Political Alchemy of Commodity Money

Furthermore, if individuals lose confidence in a country’s currency, the money will no longer have any purchasing power. Commodity money has been used throughout history and is even used today in certain circumstances. Even though traders may not accept it; the population was left reassured that it had alternate uses. Linguistic and Commodity Exchanges Examines the structural differences between barter and monetary commodity exchanges and oral and written linguistic exchanges. Many critics of the Fed believe it has gone too far by creating so much money and flooding the system with that much liquidity. I didn’t know this, but the first known currency was established in 660 B.C.

forms of money

As we decide whether Bitcoin creates “money” or not, we need to understand the difference between fiat money and commodity money. At the same time, cross-border transactions and stability will make gold-backed stablecoins an irresistible proposition for many and an ETC intriguing opportunity for many more. The disadvantages of commodity money led to the rise of another type of money known as Fiat money.

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This was true throughout the history of gold money too; successive emperors adulterated the Roman coinage, creating a disconnect between gold and face value and leading to periods of economic instability. It’s this capacity of value guarantors — whether franking on a gold coin or writing on paper money — to be manipulated to the detriment of currency value that makes fiat and representative currencies unstable. When the face value of coins remained the same while their gold and silver content fell, the result was usually a loss of confidence in the coinage.

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Estimating the Role of Seven Commodities in Agriculture-Linked Deforestation: Oil Palm, Soy, Cattle, Wood Fiber, Cocoa, Coffee, and Rubber.

Currency, some argue, remains physical such as coins, notes, and credit cards. And money equals an intangible concept denoting the value we place in a currency as having a value. On the other hand, consider the assets employed in business—the physical plant, the equipment, and the money—things that are maintained and developed. Commodity money in the time of high inflation can be used as a buffer as commodities have a value of their own, which currencies do not have. •Commodity money is subject to supply and shocks; fiat monies can be manipulated by monetary authorities. In order to maintain its value, money must have a limited supply.


Gold coins were valuable because they could be used in exchange for other goods or services, but also because the gold itself was valued and had other uses. Commodity money gave way to the next stage-representative money. Fiat money is a medium of exchange that is backed by the government and nothing else.


The most successful companies manage their workforce effectively as assets not commodities. Consider the commodities a business employs—pads of paper, ballpoint pens—things that you purchase, use up, and then discard. Money acts as a standard measure and common denomination of trade. The most direct strategy is to simply buy up a large percentage of the available commodity offered for sale in some spot market and hoard it.

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Distinguish between commodity money and fiat money, giving examples of each. Banks take client deposit and then loan a portion to other clients. The reserve requirement ratio is the portion of deposits banks can lend to different clients. Commodity money is a medium of exchange with intrinsic value due to its use for purposes other than money. Examples of fiduciary money include instruments such as checks, banknotes, and drafts. They are a type of money as holders of fiduciary money can convert them into fiat or other types of money.

The https://www.beaxy.com/ of goods and services in markets is among the most universal activities of human life. To facilitate these exchanges, people settle on something that will serve as a medium of exchange—they select something to be money. Commodity money is a medium exchange with intrinsic value due to its use for purposes other than money. Examples of this include gold like the one in Figure 1 and silver. There will always be a demand for gold as it can be used in jewelry, making computers, Olympic medals, etc. Furthermore, gold is durable, which adds even more value to it.

The value of fiat money is determined by supply and demand, and if there’s too much supply of fiat money in the economy, its value will decline. Fiat money was created as a substitute for commodity money and representative money in the early 20th century. Representative money is a type of money that is issued by the government and backed by commodities such as precious metals like gold or silver. Economies relying on bartering usually evolve to identify something that can be used as a median of exchange. Normally it is a commodity which has sufficient demand that traders know that even if they do not have a use for the commodity, they can easily trade it for something useful. It has become money if people accept that commodity as a medium of exchange even if they don’t plan to use it themselves.

What is commodity money and fiat money?

fiat monies. The value of fiat money is based largely on public faith in the issuer. Commodity money's value, on the other hand, is based on the material it was manufactured with, such as gold or silver. Fiat money, therefore, does not have intrinsic value, while commodity money often does.

The first coin ever minted contained a figure of a roaring lion. The money that is earned through exports is used to pay for imported products and in this way, the numerous needs of South Africans are satisfied. Any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. For instance, coins are often milled with a reeded edge, so that any removal of material from the coin will be easy to detect. This is why diamonds, works of art, or real estate are not suitable as money.

Its role as a medium of exchange makes it a convenient store of value. Define what is meant by the money supply and tell what is included in the Federal Reserve System’s two definitions of it . Its value is derived from its official recognition as a medium of exchange from government legislation.

  • Individuals may also debase gold or silver coins by clipping the edges or filing off shavings from coins, melting those small amounts down, and selling them.
  • In response to serious economic problems, the country’s central bank began to print money at a staggering pace.
  • Commodity money is money that has intrinsic value, meaning that it has value even if it is not used as money.
  • Proponents of the gold standard argue that this type of system helps control credit expansion and controls the lending standards employed by banks.

Most types of cash used today do not have any real intrinsic value. For example, a banknote is virtually worthless in itself and only has value because society accepts it as a measure of currency and a unit of exchange. The main difference between commodity and fiat money is that commodity money has an intrinsic value. In other words, it has a use and value outside of its use as money. For example, gold can can be used in jewellery as well as a money.

Monetarist theory suggests that inflation is alternatively the reduction in the purchasing power of a unit of currency in an economy. Inflation measures the rate at which the average price levels in an economy increase over time. Commodity money, however, retains value based on the metal or other material content it has. Fiat money is therefore more at risk of inflation because its value is not intrinsic. Commodity money has intrinsic value because it has other uses besides being a medium of exchange.

  • The first coin ever minted contained a figure of a roaring lion.
  • Commodity money requires no recognition or approval from the government.
  • We can expect to see this partly as confidence in these currencies falls in the wake of stimulus packages designed to pump money into the economy.

The concept of money speaks to the significant evolution of economic exchange. Prior to the inception of money, bartering was the prime means of exchange. It is defined by the exchange of one good or service for another good or service.


Everyone in the country where a fiat currency is recognized as a legal tender is legally obliged to accept or use it as payment. Before 1970, the world was governed by the gold standard, which allowed people to swap the currency they owned for gold at any time. Countries that adhered to the gold standard established a fixed price for gold and traded gold at that price, therefore maintaining the gold standard. The value of the currency was determined based on the fixed price established. Money is an asset that people use to purchase goods and services. Together with goods and services, it is the backbone of trade.