What is Commodity Money?

John Lister

Commodity money is a form of money that has an intrinsic value, meaning it is worth something in its own right rather than simply being a token of financial value such as a banknote. The best known form is gold or silver coins, though any commodity can fulfill this role.

Paper money is not commodity money because it has relatively little actual worth on its own.
Paper money is not commodity money because it has relatively little actual worth on its own.

Most types of cash used today do not have any real intrinsic value. For example, a banknote is virtually worthless in itself and only has value because society accepts it as a measure of currency and a unit of exchange. This type of currency is known as fiat money.

These rare Greek silver coins had the underlying value of the material they are made from and were thus commodity money.
These rare Greek silver coins had the underlying value of the material they are made from and were thus commodity money.

Historically, other forms 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.

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Cigarettes may be used as a form of commodity money in some circumstances.
Cigarettes may be used as a form of commodity money in some circumstances.

Some forms of commodity money may only fulfill the money role in very specific circumstances. Perhaps the best known example is the use of cigarettes as currency in prisons. With no cash available to prisoners, cigarettes can serve as a medium of exchange that avoids the need to rely on bartering for direct exchange of items. Cigarettes also have intrinsic value, as they can be smoked.

Cigarettes are a form of currency among prison populations.
Cigarettes are a form of currency among prison populations.

Something that serves as commodity money only has to have value in itself, rather than being of use to the bearer. For example, there is little most people can actually do with a gold coin and, if someone is a smoker, a cigarette is of more practical use. The gold coin has a much higher value, though, as a jeweler or goldsmith would be able to make use of it to produce an expensive object.

Where metal coins are used as an officially recognized currency, the government will set a fixed value for each type of coin. It is this value that prevails in the economy, rather than the actual worth of the metal in each coin. Usually, the coin's face value will be more than the actual costs of the component metals. In a few rare situations, the combination of inflation devaluing currency and metal prices rising, a coin may be worth more as a metal than a unit of currency. If this persists, the government may decide to withdraw that unit of currency from circulation.

The best known form of commodity money is gold coins.
The best known form of commodity money is gold coins.

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Discussion Comments

helene55

Coupons and tokens at businesses are also commodity money. For example, giving someone a gift card for a store you don't like, but they do, can be a way of providing them with commodity money. Things like two for one coupons might also work if you know someone who really wants or needs a certain product for which you have a coupon that you don't plan on using.

stolaf23

On college campuses there can be many types of commodity money. For example, at my school we had "flex" dollars as part of our meal plan that were only usable in the campus cafe. That meant that you often could pay people back in these flex dollars by buying them food, rather than actually paying back in real money, provided they saw it as a fair trade.

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