Commodity money
This article is licensed under the GNU Free Documentation License. It uses material from the Wikipedia article "Commodity_money".

Commodity money is money whose value comes from a commodity out of which it is made.

Examples of commodities that have been used as mediums of exchange include gold, silver, copper, salt, peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis, and candy. Of course the above commodities, although used "as money", are not real money, because money must also have the mark of the authority that coins it.

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Aspects

Commodity money is not just a simple commodity, used as medium of exchange. Commodity money must also have an unalterable mark by an authority, assuring that the commodity is real and not a counterfeit one.

Commodity money is to be distinguished from representative money which is a certificate or token which can be exchanged for the underlying commodity. A key feature of commodity money is that the value is directly perceived by the users of this money, who recognize the utility or beauty of the tokens as they would recognize the goods themselves. That is, the effect of holding a token for a barrel of oil must be the same economically as actually having the barrel at hand. This thinking guides the modern commodity markets, although they use a sophisticated range of financial instruments that are more than one-to-one representations of units of a given type of commodity.

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

Radford documented the way that this 'cigarette currency' was subject to Gresham's Law, inflation, and especially deflation.

Historical Significance

Commodities 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 wampum, maize, iron nails, beaver pelts, and tobacco. In post-war Germany, cigarettes became used as a form of commodity money in some areas. Cigarettes are still used as a form of commodity money in U.S. prisons (Lankenau 2001, p. 142 concludes that where jails don't ban them, the prison "gray market" creates a largely benign use of the cigarette as "currency").

Historically, gold was by far the most widely recognized commodity out of which to make money. Gold was used as a medium of exchange in the absence of money, because people were convinced that authorities are going to used it as money, when stability returned. Gold was authorities's favorite because it was compact, did not corrode, had decorative and functional utility as finely strung wire, thin foil leaf, and other ornaments, could always be traded for other more functional metals and goods.

The Fort Knox gold repository long maintained by the United States, functioned as a theoretical backing for federally issued "gold certificates" to substitute for the gold. 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 influential economists. 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.

Metals

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 differs between commodity money and fiat money. In situations where there is a 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 1997 when their content of stainless steel became larger than the fiat or face value of the coins. [1]. In the US, the metal in pennies (mostly zinc) and the metal in nickels (mostly copper) in both cases is now worth more than the fiat face value of the coin.

Concerns

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. The cost of such storage is often referred to as demurrage and is in some instances regarded as a positive influence on the overlying financial system. 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 money - the beginning of a long slow shift to credit money.

Also, commodity supplies and protections of supplies by states' military fiat remain critical to trade, and there are active commodity market speculations on the stability of certain states, e.g. speculation on the survival of the regime of Saddam Hussein in Iraq did from time to time drive the price of oil. Some argue that this was not so much a commodity market but more of an assassination market speculating on the survival (or not) of Saddam himself.

See also

References

  1. ^ http://www.timesonline.co.uk/tol/news/world/asia/article1940319.ece

External links
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