Commodity money

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

Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods. [1] This is in contrast to representative money, which has no intrinsic value but represents something of value such as gold or silver, for which it can be exchanged, and fiat money, which derives its value from having been established as money by government regulation.

Contents

Examples of commodities that have been used as media of exchange include precious metals and stones, grain, animal parts (such as beaver pelts), tobacco, fuel, and others. Sometimes several types of commodity money were used together, with fixed relative values, in various commodity 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 by a formal process. A key feature of commodity money is that the value is directly perceived by its users, who recognize the utility or beauty of the tokens as goods in themselves. 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 containers 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 currency is prohibited. [3]

Metals

In metallic currencies, a government mint will coin money by placing a mark on metal tokens, typically gold or silver, which serves as a guarantee of their weight and purity. In issuing this coinage at a face value higher than its costs, the government gains a profit known as seigniorage.

The role of a mint and of coin differs between commodity money and fiat money. In 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.

History

A bronze okpoho or manilla, the traditional commodity money in West Africa until the 1940s. Manillaokhapo.JPG
A bronze okpoho or manilla, the traditional commodity money in West Africa until the 1940s.

Commodities often come into being in situations where other forms of money are not available or not trusted, and these are social norms. Various commodities were used in pre-Revolutionary America including wampum (shell beads), maize (corn), iron nails, beaver pelts, and tobacco.

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 made beaver (representing a single beaver pelt) as the standard currency, and created a price list for goods:

Examples of Hudson's Bay Company tokens used c. 1854, representing one made beaver along with fractional values. Hudson's Bay Company brass token set.jpg
Examples of Hudson's Bay Company tokens used c. 1854, representing one made beaver along with fractional values.

Other animal furs were convertible into beaver pelts at a standard rate as well, so this created a viable currency in an economy where precious metals were not valued. [5] However, for convenience, Hudson's Bay post managers exchanged made beaver coins, which were stamped pieces of copper or brass.

Long after gold coins became rare in commerce, the Fort Knox gold repository of the United States functioned as a theoretical backing for Federal Reserve. 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 government policy. 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, and finally a fiat currency backed by government authority and social perceptions of value.

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. [6] They have continued to be used as currency in war-torn locations experiencing inadequate supply of common goods and monetary collapse, such as during the Siege of Sarajevo in 1993 [7] or in Russian-occupied Kherson in 2022. [8]

Functions

Axe-like grzywnas (commodity money) from Kostkowice, Poland, 9th to mid-10th century AD Axes-like grzywnas (commodity money) from Kostkowice, Poland, 9-mid X Century AD.jpg
Axe-like grzywnas (commodity money) from Kostkowice, Poland, 9th to mid-10th century AD

Although grains such as barley have been used historically in relations of trade and barter (Mesopotamia circa 3000 BC), they can be inconvenient as a medium of exchange or a standard of deferred payment due to transport and storage concerns and eventual spoilage. Gold or other metals are sometimes used in a price system as a durable, easily warehoused store of value (demurrage).

The use of barter-like methods using commodity money may date back to at least 100,000 years ago.[ citation needed ] Trading in red ochre is attested in Eswatini, shell jewellery in the form of strung beads also dates back to this period, and had the basic attributes needed of commodity money.[ citation needed ] 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.[ citation needed ]

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. [9]

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. [10]

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, [11] so that a seller who refuses to accept them cannot be sued by the payer 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

Related Research Articles

<span class="mw-page-title-main">Barter</span> Direct reciprocal exchange of goods or services without the use of money

In trade, barter is a system of exchange in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as money. Economists usually distinguish barter from gift economies in many ways; barter, for example, features immediate reciprocal exchange, not one delayed in time. Barter usually takes place on a bilateral basis, but may be multilateral. In most developed countries, barter usually exists parallel to monetary systems only to a very limited extent. Market actors use barter as a replacement for money as the method of exchange in times of monetary crisis, such as when currency becomes unstable or simply unavailable for conducting commerce.

A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a system of money in common use within a specific environment over time, especially for people in a nation state. Under this definition, the British Pound sterling (£), euros (€), Japanese yen (¥), and U.S. dollars (US$) are examples of (government-issued) fiat currencies. Currencies may act as stores of value and be traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are either chosen by users or decreed by governments, and each type has limited boundaries of acceptance; i.e., legal tender laws may require a particular unit of account for payments to government agencies.

<span class="mw-page-title-main">Gresham's law</span> Monetary principle, "bad money drives out good"

In economics, Gresham's law is a monetary principle stating that "bad money drives out good". For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will gradually disappear from circulation.

<span class="mw-page-title-main">Precious metal</span> Rare, naturally occurring metallic chemical element of high economic and cultural value

Precious metals are rare, naturally occurring metallic chemical elements of high economic value. Precious metals, particularly the noble metals, are more corrosion resistant and less chemically reactive than most elements. They are usually ductile and have a high lustre. Historically, precious metals were important as currency but are now regarded mainly as investment and industrial raw materials. Gold, silver, platinum, and palladium each have an ISO 4217 currency code.

A store of value is any commodity or asset that would normally retain purchasing power into the future and is the function of the asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved.

<span class="mw-page-title-main">Unit of account</span> Money function

In economics, unit of account is one of the functions of money. A unit of account is a standard numerical monetary unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt.

<span class="mw-page-title-main">Medium of exchange</span> Method by which value is transferred between parties.

In economics, a medium of exchange is any item that is widely acceptable in exchange for goods and services. In modern economies, the most commonly used medium of exchange is currency. Most forms of money are categorised as mediums of exchange, including commodity money, representative money, cryptocurrency, and most commonly fiat money. Representative and fiat money most widely exist in digital form as well as physical tokens, for example coins and notes.

A monetary system is a system 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.

<span class="mw-page-title-main">Financial transaction</span> Form of agreement carried out between a buyer and seller

A financial transaction is an agreement, or communication, between a buyer and seller to exchange goods, services, or assets for payment. Any transaction involves a change in the status of the finances of two or more businesses or individuals. A financial transaction always involves one or more financial asset, most commonly money or another valuable item such as gold or silver.

<span class="mw-page-title-main">International finance</span> Financial services between nations

International finance is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries. International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade.

The history of the United States dollar began with moves by the Founding Fathers of the United States of America to establish a national currency based on the Spanish silver dollar, which had been in use in the North American colonies of the Kingdom of Great Britain for over 100 years prior to the United States Declaration of Independence. The new Congress's Coinage Act of 1792 established the United States dollar as the country's standard unit of money, creating the United States Mint tasked with producing and circulating coinage. Initially defined under a bimetallic standard in terms of a fixed quantity of silver or gold, it formally adopted the gold standard in 1900, and finally eliminated all links to gold in 1971.

<span class="mw-page-title-main">Silver standard</span> Monetary system

The silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. Silver was far more widespread than gold as the monetary standard worldwide, from the Sumerians c. 3000 BC until 1873. Following the discovery in the 16th century of large deposits of silver at the Cerro Rico in Potosí, Bolivia, an international silver standard came into existence in conjunction with the Spanish pieces of eight. These silver dollar coins played the role of an international trading currency for nearly four hundred years.

The history of money is the development over time of systems for the exchange, storage, and measurement of wealth. Money is a means of fulfilling these functions indirectly and in general rather than directly, as with barter.

<span class="mw-page-title-main">Money</span> Object or record accepted as payment

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 primary functions which distinguish money are: medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.

The made beaver was a unit of account used in the Hudson's Bay Company (HBC), located in British North America. One male beaver skin collected during winter months was equivalent to one made beaver.

Metallism is the economic principle that the value of money derives from the purchasing power of the commodity upon which it is based. The currency in a metallist monetary system may be made from the commodity itself or it may use tokens redeemable in that commodity. Georg Friedrich Knapp (1842–1926) coined the term "metallism" to describe monetary systems using coin minted in silver, gold or other metals.

Currency money is money in full circulation that takes its value from the precious metal it contains, that is, its market value is (almost) the value of the metal it contains, though this is always overcompensated for in coins and banknotes from a country undergoing debasement. Currency money is usually made of silver or gold, but in very rare cases plated metal and even copper may be used. Currency or face value coins are a type of commodity money, money whose value is derived from the what it is or what it is made of as opposed to coins whose metal value is less than their nominal value, paper money, and deposit or book money, which are fiat money.

<span class="mw-page-title-main">Fiat money</span> Currency not backed by any commodity

Fiat money is a type of currency that is not backed by a precious metal, such as gold or silver, or backed by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tender, and is authorized by government regulation. Since the end of the Bretton Woods system in 1971, the major currencies in the world are fiat money.

In macroeconomics, chartalism is a heterodox theory of money that argues that money originated historically with states' attempts to direct economic activity rather than as a spontaneous solution to the problems with barter or as a means with which to tokenize debt, and that fiat currency has value in exchange because of sovereign power to levy taxes on economic activity payable in the currency they issue.

A stablecoin is a type of cryptocurrency where the value of the digital asset is supposed to be pegged to a reference asset, which is either fiat money, exchange-traded commodities, or another cryptocurrency.

References

Citations

  1. ↑ O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Prentice Hall. p. 246. ISBN   978-0-13-063085-8.{{cite book}}: CS1 maint: location (link)
  2. ↑ Radford (1945)
  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.[ dead link ]
  5. ↑ "The Fur Trade and Hudson's Bay Company". Archived from the original on 2015-01-08. Retrieved 2015-01-05.
  6. ↑ "Troublesome in Europe: Black Markets". Leader-Post . Regina, Saskatchewan. 1946-01-05. Retrieved 2012-11-28.
  7. ↑ Sudetic, Chuck (1993-09-05). "Cigarettes a Thriving Industry in Bleak Sarajevo". The New York Times. ISSN   0362-4331 . Retrieved 2022-03-31.
  8. ↑ ""Самая крепкая валюта - это сигареты". Как выживает Херсон при российской оккупации". 11 April 2022.
  9. ↑ Charles F. Horne, PhD (1915). "The Code of Hammurabi : Introduction". Yale University. Retrieved December 8, 2015.
  10. ↑ Dow, Sheila C. (2005). "Axioms and Babylonian thought: a reply". Journal of Post Keynesian Economics. 27 (3): 385–91. doi:10.1080/01603477.2005.11051453. S2CID   153637070.
  11. ↑ 31 U.S.C.   § 5103

Sources

Further reading

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