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. If the monetary system collapsed, commodity money would still retain value for other purposes.
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. Generally, commodity money means gold and silver coins, though throughout history a remarkable variety of commodities have served as money.
Branded with a "T"¶
What do cattle and cheese and barley have in common? They have all been used as a form of currency in different parts of the world at some point in history. Before there was cryptocurrency on a computer, and before there were coins and bills in a wallet, money was virtually indistinguishable from common items found on the dinner table. And as odd as that may sound, consider that in hundreds of years, people will probably look at gold coins, dollars, and even Bitcoin as equally odd forms of money.
Before the invention of coinage, currency was a social convention subject to local custom, tradition, and whatever natural resources happened to be in the area. Trade was just that -- swapping items for other goods, services, or perhaps even relationships. These micro-money networks operated in isolation, often without formal written rules or standardization. Money is born of necessity. Throughout history, people have used what was around them to solve the problem of the moment. The invention of money, considering its usefulness throughout history and in all parts of the world, is comparable to the discovery of fire and the invention of the wheel -- and yet it is among the least understood inventions in existence.
Historical Examples¶
Cattle: Used by ancient civilizations including the Sumerians, Babylonians, Romans, Vikings, and the Maasai people of East Africa. Cattle were used as currency due to their practicality -- they could be used for farming, transportation, and food. Value was based on weight and size, with larger, more robust cattle being more valuable. So valuable were cattle that theft meant a death sentence, dating back to the Code of Hammurabi in ancient Babylon (1750 BC). By 1850 in the American West, cattle theft was punished by branding the letter "T" on the thief's forehead.
Feathers: Used by Native American tribes in North America, the Inca Empire in South America, and the Bantu in Africa. Feathers were considered sacred and used in religious ceremonies as symbols of power and status. In the United States, it remains illegal under federal law to possess the feather of a Bald or Golden eagle, with exceptions granted for Native American religious ceremonies.
Cowrie Shells: First used in China as early as 1200 BCE, spreading throughout Asia, India, Persia, and Africa. The cowrie shell became one of the most widely used forms of commodity money in history. The Wampum belt, made from white and purple shell beads, was used by the Iroquois Confederacy as a symbol of unity and means of exchange.
Whale Teeth: Used by the Maori of New Zealand (reiwai), Fijians (tabua), and Inuit of Canada and Greenland (qilaut). The difficulty of obtaining whale teeth -- requiring advanced seafaring technology and risking death -- made them scarce and valuable. Even with a good canoe, sharp spears, and several friends, whale hunting required extraordinary skill and courage. However, whale teeth were not easily divisible, making them impractical for small transactions.
Yap Stones: Used by the people of Yap, an island in the western Pacific. These large circular limestone disks, some over twelve feet in diameter and weighing several tons, were quarried on the island of Palau over 250 miles away and transported by raft. Uniquely, Yap stones did not need to be physically moved to facilitate transactions -- ownership was transferred through oral agreement while the stone remained in place.
Cheese: Parmesan cheese wheels have been used as a form of currency and collateral throughout Italian history. In the Middle Ages, landowners paid workers in cheese wheels. During the 19th century, Italian banks accepted Parmesan as collateral for loans. Today, in the town of Bibbiano, a local bank still accepts Parmesan cheese wheels as collateral.
Barley: The first form of money used in Mesopotamia. Barley was chosen because it was abundant, easily divisible, and a staple food. The value was based on weight, measured in standardized units called shekels. While barley could store value for a while, it would not last long -- susceptible to the elements and thieving mice -- making it a short-term money solution.
The Invention of Money¶
Ancient Mesopotamia, located at the crossroads of Europe, Asia, and Africa, benefited from a fortunate mix of geography, economy, and communication. The Mesopotamians developed one of the earliest writing systems -- cuneiform, a series of wedge-shaped marks impressed into clay tablets. This enabled reliable transaction ledgers. From the combination of ledgers, location, and abundant resources grew an extensive trade network. These three ingredients, coming together at just the right time, earned Mesopotamia a distinction in history: the birthplace of money.
The first coins were developed around 2500 BC -- small, flat clay pieces called bullae, marked with the amount of barley represented and the names of transacting parties. Sealed with string or clay for tamper-proofing, bullae are among the earliest forms of token money. As trade grew, merchants began using metal rings and coins made of silver and gold. The first metal coins were introduced around 2000 BC -- small, round silver pieces also called shekels, stamped with images of gods and kings.
Standardization: The Lydian Innovation¶
King Alyattes of Lydia (modern-day western Turkey) introduced the world's first standardized coinage system around 610-560 BC. Using electrum, a natural alloy of gold and silver found in Lydian riverbeds, the Lydians developed minting -- heating metal until molten, pouring it into standardized molds to create uniform coins. The resulting staters, featuring a lion's head on one side, became widely accepted throughout the Mediterranean region.
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. Part of the mystery of what makes something money can be explained by understanding the five properties of good money: durability, divisibility, portability, scarcity, and acceptance. Each early form of money exhibited at least one of these characteristics, and though it took nearly 3,000 years, humanity finally figured out the right formula.
However, not all commodities make good money. Cattle lack durability and divisibility, whale teeth are not easily divisible, and items like feathers or cheese lack the combination of properties needed for widespread, long-term use. Coinage solved many problems associated with efficient trade, but it also created three new ones: counterfeiting became a concern, exchange rate differentials became lucrative, and debasement -- altering the nature of currency to cheapen its value -- became too tempting for bankers and kings.
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. Bitcoin's scarcity is artificial and arbitrary (the choice of 21 million could have been any number), but it is difficult to obtain and practically impossible to counterfeit, which gives it economic scarcity through opportunity cost.