Commodity money refers to money
whose value comes from a commodity
out of which it is made. Examples of commodities that have been
used as money include gold, silver, copper, salt, large stones,
shells, and cigarettes.
Commodity money is to be distinguished from representative money which is a certificate or token which can be exchanged for the underlying commodity. It is not necessary for the commodity itself to have any intrinsic value although it is necessary that the commodity be somewhat scarce.
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 is different between commodity money and fiat money. In situations were there is commodity money, the coin retains its value if it is melted and physically altered, while in fiat money it does not.
Commodity money often comes into being in situations where other forms of money are not available or not trusted. Various commodities were used in pre-Revolutionary America including indian corn, iron nails, beaver pelts, and tobacco. In post-war Germany, cigarettes became used as a form of commodity money in some areas.
Although commodity money is more convenient than barter,
it can be inconvenient to use as a medium
of exchange or a standard
of deferred payment due to the transport and storage concerns.
Accordingly, notes began to circulate that a government or other
trusted entity (e.g. the Knights Templar in Europe in the 13th century)
would guarantee as representing a certain stored value on account.
This creates a form of money known as representative
Historically gold was by
far the most widely recognized commodity out of
which to make money: gold was compact, easy to
work into more beautiful jewelry, had decorative and functional
utility as a finely strung wire or thin foil leaf, and most importantly,
could always be traded for other metals to make weapons with. A
state could be described as a political enterprise with sufficient
land, gold and reputation for protecting both, e.g. the Fort Knox
gold repository long maintained by the United
States, could reliably issue certificates to substitute for
the gold and be trusted to actually have it. Until 1970, U.S. currency
was technically worth exactly 1/35 of an ounce of gold. However,
actual trade in gold as a precious metal within the United States
was banned - presumably to prevent anyone from actually going up
to Fort Knox and asking for their gold. This was a fairly typical
transition from commodity to representative to fiat
money, with people trading of being forced to trade in gold,
receive paper money
that purported to be as good as gold, and then
ultimately see this currency "float" on commodity
The theory of natural
capitalism and of global resource banking have more recently
been used to suggest a form of money based on ecological yield.
While this would be based on water,
energy or ecosystem
products, some of which have a strict commodity
definition, such goods cannot be held directly, and so it is more
common to suggest that representative
money be issued based on enhancing and extending nature's
services, giving one the right to receive the yield as benefit.
Critics of this type of proposal often note that, as with other
transitions from commodity to representative money, inadequate substitutes
will be made on a "just trust me" basis - as per Gresham's
Law which states that bad money dries out good. Other proposals,
such as time-based
money, rely on the availability of human labour
as a commodity, especially within a community, which is presumably
harder to guarantee access to, but also harder to steal. Still others
deny the utility of commodifying labour as such, and suggest making
free time the standard, since physical
capital used for leisure, sport, art, theatre, and other forms
of play is commodifiable and possible to control. Amartya
Sen in Development As Freedom discussed the relationship
between access to commodities, labour, and "the right to live as
we would like".
It is hard to imagine a physical commodity which would again serve as money.