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Commodity Money: Definition, Examples & Characteristics


For example, fiat money tends to be accepted so long as too much of it is not printed too quickly. When that happens, as it did in Russia in the 1990s, people tend to look for other items to serve as money. In the case of Russia, the U.S. dollar became a popular form of money, even though the Russian government still declared the ruble to be its fiat money. In Romania under Communist Party rule in the 1980s, for example, Kent cigarettes served as a medium of exchange; the fact that they could be exchanged for other goods and services made them money. The value of fiat money is BNB determined by supply and demand, and it was created as a substitute for commodity money and representational money in the early 20th century.

commodity money definition

Prices rose rapidly and consumers were forced to carry bags of money just to purchase basic staples. At the height of the crisis, one U.S. dollar was worth about 8.31 billion Zimbabwean dollars. In 1971, the U.S. stopped offering foreign governments gold in exchange for U.S. currency. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

Commodity currency

Several types of commodity money were sometimes used together, with fixed relative values, in various commodity valuation or price system economies. Typically, a token backed by a commodity, referred to as a stablecoin, will be set up with a traditional custody and trust structure managing the underlying assets. Trustees are regulated financial professionals who manage assets, while custodians arrange for secure holding, whether themselves or through third parties.

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  • The term money, as used by economists and throughout this book, has the very specific definition given in the text.
  • The difference between fiat money and representative money is that fiat money gets its value from demand and supply.

Cows come in many sizes and shapes and each has a different value; cows are not a very uniform commidity money. Twenty-dollar bills are all the same size and shape and value; they are very uniform. Money is a medium of exchange that can be used to facilitate transactions for goods and services. The gold standard is a system in which a country’s government allows its currency to be freely converted into fixed amounts of gold.


All three have their pros and cons, yet the arguments about commodities being safe and trusted keep them alive despite their critics colorfully referring to them as barbaric relics of ancient history. Another way that commodity money sees inflation is through the debasement of the currency. Debasement means that money, typically metal coins, is devalued because there is less precious metal in the coin than the value stamped on its face.


Examples of commodity money includes commodities such as gold, silver, copper. The Fed uses monetary aggregates to measure the money supply in the economy. Monetary aggregates measure the amount of money that circulates in the economy.

What are the different types of money?

bank money is important because it helps create liquidity and funds in an economy. It ensures that the money deposited in saving accounts is efficiently used to generate more funds in the economy that could be used for investment and development. What’s the difference between gold and cash as a type of money? Why do we use cash and not other types of money to perform transactions?

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Historically, other of money were used that did have an underlying value, such as foods, fuels, or metals. Such commodities are not widely used in modern economies as their underlying value can vary immensely from their agreed currency value. There is also the problem that many of these items are prone to spoiling or deteriorating.

In economic terms, commodity money has what is known as an ‘intrinsic value’. Therefore, anything that has an alternate use could be considered a commodity form of money. During this period, Lydian merchants produced a gold coin mixed with silver; otherwise known as electrum. Their aim was to help improve the efficiency of trading between countries. It was a useful store of value, it was durable, and it was widely accepted between nations.

type of money

M0 is the monetary base in an economy and covers the entire currency that is either at the hands of the public or in bank reserves. Consider what happens when Lucy visits Bank A, and she deposits $1000 dollars in her checking account. Bank A can keep $100 aside and use the rest to lend it to another client, John. The reserve requirement, in this case, is 10% of the deposit. John then uses the $900 to purchase an iPhone from another customer, Betty.

Trusts are audited by third parties, and in an additional layer of protection, tokens are issued on a public blockchain that’s transparent, unhackable and automatically preserves immutable audit trails. The tokens issued represent a legal claim on the trust’s contents — ownership in a certain sum of gold. When societies choose to utilize such commodity money as metal coins for their official legal tender, it is up to the government in question to determine the fixed value of each coin in the currency lineup.

What is a commodity based money?

Commodity money is the type of money that is made of precious metals or commodities that have intrinsic value. It is not just a token or representative of monetary value like banknotes. Its worth remains intact even after it is melted. Gold and silver coins are the perfect example of commodity money.

Commodities like cattle or gold bars cannot be divided into smaller parts for everyday purchases. ∗We are indebted to the Federal Reserve Bank of Minneapolis for financial support. However, the views expressed herein are solely those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

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  • Because of the model’s simplicity we use it as the foundation on which we build more complicated models.
  • Depending on whether the inflation is economically beneficial, this could be positive .

For instance, in addition to being commodity money, cigarettes can be smoked, while gold and silver can be used for making pieces of jewelry. Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

In today’s prices, $55,000 is about a kilogram of gold bullion. That’s light enough to be a target for theft, heavy enough to make transporting it securely from, say, the United States to Hong Kong a serious inconvenience. Commodity money consists of objects having value or use in themselves as well as their value in buying goods. By using this service, you agree that you will only keep content for personal use, and will not openly distribute them via Dropbox, Google Drive or other file sharing servicesPlease confirm that you accept the terms of use. THE NEED FOR exchange is derived from the problem that the goods a person produces may not be the goods that person wants to consume. In Chapter 1 we modeled this problem by assuming that people had goods when young but also wanted to consume when old.

Gold is not money because it is not used as a medium of exchange. For example, it took about 133 times as many “Saddam” dinars as “Swiss” dinars to buy a man’s suit in Iraq at the time. The new notes, sometimes called “Bremer” dinars, were printed in Britain and elsewhere and flown into Iraq on 22 flights using Boeing 747s and other large aircraft.

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