What is Commodity Money?

Commodity money refers to goods that serve as a general means of exchange and measure of value instead of coins or today's fiat money. Commodity money, also called money in kind, refers to a means of payment that, in addition to its exchange value, usually also has an intrinsic value, in the form of the commodity itself.

Commodity Money has a fundamental Value

Commodity money has a certain fundamental value and, if the commodity loses its function as a monetary unit, can be consumed or used as a good. Historical examples of common commodity money were precious metals, salt, shells, cigarettes, stones, or pearls.

Importance of Commodity Money declines

While commodity money was once widespread, it has become almost irrelevant in today's society as government fiat currencies have become the common means of payment. Where fiat money is not available or is prohibited, commodity money is still used today.

For example, cigarettes are often used as a form of payment in prisons. Commodity money is also popular alternatives in regions where there is severe (hyper) inflation or war.

Properties of Commodity Money

Commodity money is always a scarce commodity. It is a commodity that cannot be multiplied at will or require a great deal of labor and time to obtain or create.

It must also be storable for a certain period of time, i.e. retain its value for a longer period of time. Goods that age or are complicated to store are therefore not suitable as long-term stores of value. Furthermore, it must be easy to verify whether the good is a counterfeit or of inferior quality.

Transportability also plays a major role. In the past, in a small local ecosystem, commodity money could easily be physically transferred from one party to the other to complete a purchase. In a world where international trade is becoming increasingly important, commodity money has never taken hold on a large scale.

Instead, more or less stable fiat currencies of major nations have become accepted as internationally recognized means of exchange.

Cigarettes as Commodity Money in World War II

In 1945, after World War II, cigarettes in particular, but also other goods, took the place of legal tender in Germany. Cigarettes had a high exchange value because they were a desirable commodity for which interested parties could be found at any time.

They were also easy to transport and could not be multiplied at will in Germany at that time. Therefore, goods and services could always be exchanged for a certain number of cigarettes and, conversely, used again for goods and services.

Conclusion

Increasing globalization poses a major hurdle to the use of commodity money. The best example of this is gold. For centuries before globalization, the precious metal was the most preferred medium of exchange and payment. Today, physical gold transactions rarely occur.

Instead, certificates backed by gold are traded worldwide. These certificates are also known as paper gold. However, it is very difficult or even impossible to verify their authenticity. This problem is also called the oracle problem.

Bitcoin has a big advantage over gold. Since bitcoin is «just» information with no physical component, they can be transferred around the globe quickly and cheaply online. Moreover, it is easy to verify that they are real Bitcoin and not counterfeits.

These are some of the reasons why bitcoin is becoming more and more attractive in today's globalized world.