The commodity money definition refers to money in the form of a commodity that has intrinsic value. This element of intrinsic value is commodity money's primary characteristic. This kind of money was first used during ancient days when trade, exchange, and economic activity, in general, were not very advanced compared to today. Commodity money can be any good that is tradeable. This good has to comply with a set of standards. For example, it has to be in wide demand, durable, portable, and easy to store. In the past, any commodity that did not comply with these standards was not accepted as commodity money.
What is Money in Economics?
Money is an asset that people use to purchase goods and services. Money forms a fundamental part of any economy. Together with goods and services, it is the backbone of trade. The concept of money speaks to the significant evolution of economic exchange. Prior to the inception of money, bartering was the prime means of exchange. It is defined by the exchange of one good or service for another good or service. Fundamentally, this captured the true value of the trade since a jar of milk could be considered equal to a dozen eggs. However, the system had a selection of profound flaws in that it accommodated a very limited variety of trades. When products like bread and cows had to be exchanged, it became hard to calculate the trade, making it unpractical. The concept of money solved this problem and consequently expanded the trade industry tremendously.
The value of money is exclusively found in the utility that people attribute to it. This utility is predominantly defined by a community or society's consensus that a certain commodity can be used as a means of exchange. Unless everyone agrees to accept the commodity as payment, that commodity will not survive as money in the system, which makes the study of modern fiat money interesting. Since the US dollar (the world's reserve currency) is not backed by gold anymore, it essentially has no intrinsic value, which calls for a different approach to be taken when studying money as a commodity that holds value. The question has to be examined as to why people attribute value to modern fiat money while it holds no value in itself. Considering a variety of economic theories, the answer to this lies in the system as a whole. Fiat money does not have value because it can be used to create jewelry like gold can. Instead, it has value because the system as a whole is built on it. There is a demand for it since everyone agrees that it can be used as a means of exchange. Beyond this, the federal government plays a big role in maintaining this structure through taxes. United States citizens cannot pay their taxes in anything other than dollars. They cannot pay taxes with cows, sheep, or financial assets like stocks or derivatives. They have to pay taxes in dollars, which essentially creates a demand for dollars. This demand is what fundamentally drives the value of money like the dollar.
Although modern fiat money solely relies on value attribution from a system and does not hold any intrinsic value in itself, a large part of the world's tertiary sector is built on it. The international foreign exchange market is the biggest financial market in the world. The amount of money that is exchanged on it on a daily basis amounts to over $6 trillion, which is a bizarre fact considering that the asset upon which the entire market is built is intrinsically worth nothing. Moreover, this system has evolved to the point where derivatives and other investment instruments have been constructed on the commodity of money. These highly evolved assets make up what is called the money market. The money market is the space where investors deal in short-term debt-based instruments that are all founded on fiat money. These extensively evolved industries have been the proponents of the large majority of history's biggest economic collapses. Historical market crashes like the Great Depression, Black Monday, the Dot-com Bubble, and the 2008 Financial Crisis draw a lot of causes from the world's financial markets. However, the highly sophisticated and rigid nature of these markets suggests that the concepts of supply and demand are growing increasingly important in comparison to the idea of intrinsic value.
What Gives Commodity Money its Value?
Commodity money's value is found in the intrinsic value of commodities. The fact that commodities can be used to produce products of value and not just as means of exchange is what makes commodity money valuable which is defined as intrinsic value. Its importance extends to a wide range of economic subjects. Financial investors and speculators commonly use intrinsic value as a metric to determine the quality of a potential investment.
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FAQs
Commodity money has been used throughout history as a medium of economic exchange. Commodity money is money that has intrinsic value, meaning that it has value even if it is not used as money. Examples of commodity money include precious metals, foodstuffs, and even cigarettes.
What is money value and commodity value? ›
Commodity value of money refers to value of the commodity (like metal) that the money is made of. Thus, if coins are made of gold or silver (as was the practice in old days), commodity value of money refers to the market value of the gold or silver contained in the coin.
What is the best example of commodity money? ›
Gold coins are the best example of commodity money. Commodity money is an asset that is backed by a specific commodity. The commodity is deemed to have an intrinsic value and is not backed by the government decree. Gold coins are commodity money as they are backed by a precious metal, gold, which has a high value.
What gives commodity money its value? ›
The value of fiat money is based largely on public faith in the issuer. Commodity money's value, on the other hand, is based on the material it was manufactured with, such as gold or silver. Fiat money, therefore, does not have intrinsic value, while commodity money often does.
Is a $5 bill commodity money? ›
Today, U.S. bills are backed by the Federal Reserve, but as fiat money. As economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved toward the use of fiat money. Fiat money is legal tender whose value is backed by the government that issued it.
What is commodity money and examples? ›
Commodity money is money that has intrinsic value, meaning that it has value even if it is not used as money. Examples of commodity money include precious metals, foodstuffs, and even cigarettes.
What is an example of a commodity value? ›
Example. If an acre of land can yield a net of 100 dollars loss by lying fallow, 50 dollars gain by being planted with corn, and 100 dollars gain by being planted with wheat, then that acre's commodity value is 100 dollars; the farmer is assumed to put his land to best use.
What are 4 examples of commodity money? ›
Historically, examples of commodity money include gold, silver, tea, alcohol, and seashells. Even if no one would accept such goods as trade, the owners could still use them for their purposes.
What is the most common form of commodity money? ›
Commodity Money: The first forms of money were commodity money. That means the money itself had value. Wheat, cowrie shells, livestock or gold have all been forms of commodity money. Historically, precious metals have been the most common form of commodity money.
What is the measure of value? ›
Money is the commonest metric used to express the value or worth of an item and service and for storing and conveying value into the future. Therefore, the monetary measurement of value of item or service is the value of the object or a service expressed in monetary terms.
Commodity money is also know as standard money because it is the monetary unit which is approved by the government to act as the legal tender in the currency system and in which other types of money in the economy like bank draft, promissory not etc. is convertible.
What are the problems with commodity money? ›
One of the major problems with commodity money was quality. Individuals tended to use or sell their best products while their poorest products would be offered as commodity money. Additionally, even good quality commodities would deteriorate if retained too long.
What is the value of a commodity called? ›
The value of a commodity expressed in terms of money is known as Price.
Why is the Canadian dollar called a commodity currency? ›
It is considered a commodity currency because it has a heavy dependence on its export of raw materials and natural resources, particularly Oil since it's the most exported commodity.
What country uses commodity money? ›
Commodity currencies are most prevalent in developing countries (eg. Burundi, Tanzania, Papua New Guinea). In the foreign exchange market, commodity currencies generally refer to the New Zealand dollar, Norwegian krone, South African rand, Brazilian real, Russian ruble and the Chilean peso.
Is gold money or a commodity? ›
On the criteria above, gold meets all the requirements needed that we can say yes, gold is a commodity. Like silver and other precious metals, it is a basic metal element. As such it is described as being fungible – identical, and totally interchangeable.
What is the difference between money and commodities? ›
Key Takeaways
Money is anything that serves as a medium of exchange. Other functions of money are to serve as a unit of account and as a store of value. Money may or may not have intrinsic value. Commodity money has intrinsic value because it has other uses besides being a medium of exchange.
What is the meaning of commodity value? ›
Commodity valuation is the process of deriving the intrinsic value of a commodity under optimal market conditions. In a perfectly competitive free market, the price of a commodity reflects the intrinsic value of that good.
What is the difference between money and commodity market? ›
Money market and commodity market are two important segments of the financial market. The money market is a platform for short-term borrowing and lending of funds, while the commodity market is a platform for buying and selling commodities such as gold, silver, crude oil, and agricultural products.
What is the difference between a commodity and a currency? ›
Commodities trade involves goods like cocoa, coffee, and products that can be mined like oil and gold. On the other hand, forex —or foreign exchange — is a global market that trades in currencies like rupees, euros, dollars, and yen.
