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Commodity money
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, in which it
can be exchanged, and fiat money, which derives its Japanese commodity money before the 8th
value from having been established as money by century AD: arrowheads, rice grains and gold
government regulation. powder. This is the earliest form of Japanese
currency.
Examples of commodities that have been used as
media of exchange include gold, silver, copper, salt,
peppercorns, tea, decorated belts, shells, alcohol, cigarettes, silk, candy, nails, cocoa beans, cowries
and barley. Several types of commodity money were sometimes 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.

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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
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 A bronze okpoho or manilla, the
than use a barter system, the fur traders established the made traditional commodity money in
beaver (representing a single beaver pelt) as the standard West Africa until the 1940s.
currency, and created a price list for goods:

5 pounds of sugar cost 1 beaver pelt

2 scissors cost 1 beaver pelt
20 fish hooks cost 1 beaver pelt
1 pair of shoes cost 1 beaver pelt
1 gun cost 12 beaver pelts

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, Examples of Hudson's Bay
Hudson's Bay post managers exchanged made beaver coins, which Company tokens used c. 1854,
were stamped pieces of copper or brass. representing one made beaver
along with fractional values.

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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
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 Axe-like grzywnas (commodity
back to at least 100,000 years ago. Trading in red ochre is attested money) from Kostkowice, Poland,
in Swaziland, shell jewellery in the form of strung beads also dates 9th to mid-10th century AD
back to this period, and had the basic attributes needed of
commodity money. 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.

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]

Legal tender issues

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
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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
Money portal

Bullion coin
Debasement
Digital gold currency
Hawala
History of money
Metallism
Private currency
Shell money

References

Citations
1. O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action (https://www.savvas.
com/index.cfm?locator=PSZu4y&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbSubSolutionId
=&PMDbCategoryId=815&PMDbSubCategoryId=24843&PMDbSubjectAreaId=&PMDbProgramId
=5657). Upper Saddle River, New Jersey 07458: Prentice Hall. p. 246. ISBN 978-0-13-063085-8.
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" (https://www.wsj.com/articles/SB12229072043909
6481). The Wall Street Journal. October 2, 2008.
4. Oconnor, Ashling (June 16, 2007). "Coins run out as smugglers turn rupees into razors" (http://ww
w.timesonline.co.uk/tol/news/world/asia/article1940319.ece). The Times. London. Retrieved
April 30, 2010.
5. "The Fur Trade and Hudson's Bay Company" (https://web.archive.org/web/20150108074343/htt
p://www.canadiana.ca/hbc/stories/produits2_e.html). Archived from the original (http://www.canadi
ana.ca/hbc/stories/produits2_e.html#) on 2015-01-08. Retrieved 2015-01-05.
6. "Troublesome in Europe: Black Markets" (https://news.google.com/newspapers?id=YL9TAAAAIB
AJ&sjid=gzgNAAAAIBAJ&pg=5535%2C527446). Leader-Post. Regina, Saskatchewan. 1946-01-
05. Retrieved 2012-11-28.
7. Sudetic, Chuck (1993-09-05). "Cigarettes a Thriving Industry in Bleak Sarajevo" (https://www.nyti
mes.com/1993/09/05/world/cigarettes-a-thriving-industry-in-bleak-sarajevo.html). The New York
Times. ISSN 0362-4331 (https://www.worldcat.org/issn/0362-4331). Retrieved 2022-03-31.
8. " "Самая крепкая валюта - это сигареты". Как выживает Херсон при российской оккупации"
(https://zv.zp.ua/samaja-krepkaja-valjuta-jeto-sigarety-kak-vyzhivaet-herson-pri-rossijskoj-okkupac
ii). 11 April 2022.
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7/13/23, 11:13 AM Commodity money - Wikipedia

9. Charles F. Horne, PhD (1915). "The Code of Hammurabi : Introduction" (http://avalon.law.yale.ed

u/ancient/hammint.asp). 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 (https://doi.org/10.1080%2F01
603477.2005.11051453). S2CID 153637070 (https://api.semanticscholar.org/CorpusID:15363707
0).
11. 31 U.S.C. § 5103 (https://www.law.cornell.edu/uscode/text/31/5103)

Sources
Radford, R.A. (1945). "The Economic Organisation of a PoW Camp" (https://web.archive.org/web/
20080717062228/http://www.albany.edu/~mirer/eco110/pow.html). Economica. 12 (48): 189–201.
doi:10.2307/2550133 (https://doi.org/10.2307%2F2550133). JSTOR 2550133 (https://www.jstor.or
g/stable/2550133). Archived from the original (http://www.albany.edu/~mirer/eco110/pow.html) on
2008-07-17. Retrieved 2009-05-09.

Further reading
Lankenau, S.E. (2001). "Smoke 'Em If You Got 'Em: Cigarette Black Markets in U.S. Prisons and
Jails" (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2117377). The Prison Journal. 81 (2): 142–
161. doi:10.1177/0032885501081002002 (https://doi.org/10.1177%2F0032885501081002002).
PMC 2117377 (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2117377). PMID 18064295 (https://
pubmed.ncbi.nlm.nih.gov/18064295).

External links
Commodity Money: Introduction (http://www.coins.nd.edu/ColCoin/ColCoinIntros/Commodity.intro.
html), about commodity money in the early American colonies.
Commodities (http://ingrimayne.com/econ/Money/Commodities.html), a summary.
Linguistic and Commodity Exchanges (https://web.archive.org/web/20070614014529/https://www.
egwald.com/ubcstudent/aboriginal/exchanges.php) Examines the structural differences between
barter and monetary commodity exchanges and oral and written linguistic exchanges.

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