Commodity Money¶
Commodity money is physical money where the thing being exchanged has value unto itself. The material or commodity used as money possesses intrinsic worth independent of its use as currency.
Definition¶
Commodity money differs from representative money in that the physical object serving as currency has inherent value based on its usefulness, scarcity, and desirability. If the monetary system collapsed, commodity money would still retain value for other purposes.
Historical Examples¶
Throughout history, various commodities have served as money:
Precious Metals: Gold and silver represent the most enduring forms of commodity money. Both metals possess all five properties of good money: durability, divisibility, portability, scarcity, and acceptance. Gold's unique characteristics—its softness making it divisible, its density giving it weight and perceived value, and its resistance to corrosion ensuring durability—made it the superior form of commodity money.
Cattle: Used by ancient civilizations including the Sumerians, Babylonians, Romans, and Vikings. Cattle served multiple purposes—farming, transportation, and food—making them practical as currency. The value was based on weight and size, with larger, more robust cattle considered more valuable. The word "capital" derives from the Latin "capita," meaning head of cattle.
Cowrie Shells: Small, easily transportable shells used as currency in China as early as 1200 BCE. The cowrie shell became one of the most widely used forms of commodity money in history, spreading throughout Asia, India, Persia, and Africa. Certain shells like the Cypraea moneta (money cowrie) were particularly valued.
Whale Teeth: Used by the Maori of New Zealand (reiwai), Fijians (tabua), and Inuit of Canada and Greenland (qilaut). These teeth were highly prized for their strength and durability. The difficulty in obtaining whale teeth—requiring advanced seafaring technology and risking death—made them scarce and valuable.
Other Commodities: Barley in ancient Mesopotamia, feathers among Native American tribes and in the Inca Empire, Yap stones in the Pacific, and even Parmesan cheese wheels in medieval and modern Italy.
Properties and Limitations¶
Commodity money meets the criterion of scarcity because obtaining it requires work and an economic choice. Mining gold, raising cattle, hunting whales, or quarrying stone all demanded significant effort, which gave these commodities value.
However, not all commodities make good money. Many early forms failed certain tests: cattle lack durability and divisibility, whale teeth are not easily divisible, and many items like feathers or cheese lack the combination of properties needed for widespread, long-term use as currency.
Transition to Metal Coinage¶
The development of metal coins represented a crucial advancement in commodity money. The first metal coins were introduced in Mesopotamia around 2000 BC—small, round silver pieces called shekels, stamped with images of gods and kings. Metal coins combined intrinsic value with standardization and portability.
King Alyattes of Lydia (610-560 BC) introduced the world's first standardized coinage system using electrum (a natural alloy of gold and silver). This minting process created uniform coins with consistent size, weight, and purity, making transactions easier and more efficient than bartering.
Contrast with Modern Money¶
Commodity money stands in stark contrast to fiat currency, which has no intrinsic value and derives its worth from government decree. While commodity money's value stems from the commodity itself, fiat currency's value depends entirely on faith and acceptance.
Bitcoin, though often called "digital gold," represents a different category—it has no physical form or intrinsic use value, yet shares scarcity characteristics through its algorithmically limited supply.