Commodity Money Definition & 11 Examples from History MINExpo INTERNATIONAL® 2021

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fiduciary money

Global RecessionGlobal recession refers to a condition when the countries across the globe experience an economic downturn for an extended period. It is a form of synchronized economic downfall encountered by the various interrelated economies throughout the world. Production CostProduction Cost is the total capital amount that a Company spends in producing finished goods or offering specific services. You can calculate it by adding Direct Material cost, Direct Labor Cost, & Manufacturing Overhead Cost.

For example, the $10 note in your pocket is unlikely to buy much in the unlikely event the US’ stops using it as its main examples of commodity money. There are four main characteristics of commodity money – it’s durable, divisible, easily exchangeable, and rare. A commodity money is a physical good that has ‘intrinsic value’ – a use outside of its use as money.

Fiat Money Vs. Commodity Money

The idea is rooted in the fact that we only ever experience deflation, across the entire economy, at times when consumer spending collapses for one reason or another. The lack of spending during these periods is bad for business as it implies unsold goods, which leads to reductions in production and increased unemployment due to redundancies. That in turn leads to even less money being spent and a downward spiral of economic output reminiscent of what occurred during the Great Depression. Moving forward to our earliest civilizations, which were built on agriculture and animal husbandry, we find that cattle was used as money. Money is, of course, that medium of exchange, and throughout our history there have been many different forms of money.

  • Consider what happens when Lucy visits Bank A, and she deposits $1000 dollars in her checking account.
  • Anyone, who clearly understands the disadvantages of Bitcoin as a unit of money and that it would eliminate a powerful monetary tool for regulating the economy, will realize that, at some point, it will begin to die!
  • Commodity money value comes from the commodity out of which it is made.
  • This is why the people in early America accepted banknotes, because the bank stood ready to redeem their notes in specie, which were gold or silver coins.
  • Instead, if the bearer demands it, the issuer of fiduciary money offers to swap it for a commodity or fiat money at the issuer’s discretion.

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. In both the northern and southern parts of Iraq, citizens turned in their old dinars for the new ones, suggesting at least more confidence at DOGE that moment in the “Bremer” dinar than in either the “Saddam” or “Swiss” dinars. After the Gulf War, the northern, mostly Kurdish area of Iraq was separated from the rest of Iraq though the enforcement of the no-fly-zone.

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Lower inflation – because commodity money is based on a physical product, i.e., gold, it is less prone to inflation from the devaluation of the money. Gold is fairly finite money, and the government cannot create more whenever they want to, thus lessening inflation. Throughout history, there remain many examples of a devaluation of money due to hyperinflation, such as Germany in the 1930s, Zimbabwe in 2016, and Argentina more recently. Fiat monies control inflation by controlling the interest rates and creating more or less money in the system.

But if the Fed issues too much money, the value will go down, as with anything that has a higher supply than demand. Before the development of a medium of exchange—that is, money—people would barter to obtain the goods and services they needed. Two individuals, each possessing some goods the other wanted, would enter into an agreement to trade. With the U.S. dollar as the world reserve currency, every country across the world naturally had a demand for dollars. This immense demand far exceeded the gold supply that the U.S. had, which was supposed to back its currency.

Commodity Money Definition & 11 Examples from History

The physical form is called fiat currency while the virtual currency is referred to as cryptocurrency. Although it is uncommon today, we can see examples of commodity-backed money throughout history. Prior to 1933, when US President Franklin D Roosevelt outlawed private gold ownership, the US economy operated according to what is known as the “gold standard”.

To get meat, that person must find someone who has bananas and wants potatoes, and so on. The most successful companies manage their workforce effectively as assets not commodities. For instance, coins are often milled with a reeded edge, so that any removal of material from the coin will be easy to detect. With the advent of futures trading, a cornerer may buy a large number of futures contracts on a commodity and then sell them at a profit after inflating the price. Commodity money value comes from the commodity out of which it is made.

In contrast, the deflation of prices related to technological goods is clear evidence that falling prices are not detrimental to economic growth. People do not avoid buying the latest smartphones simply because they expect prices to be lower in future, so the whole argument against gold or other types of commodity money is misplaced. Whilst our hunter-gatherer friends lacked access to modern money, they did have access to commodities. The meat that they hunted would not be good as a medium of exchange because it would quickly spoil, but the skins and furs that they trapped were durable, and could be used as a basic form of commodity money.

fiduciary money

These were called greenbacks because their backs were printed in green. The government-backed this currency and stated that it could be used to pay back both public and private debts. The value did, however, fluctuate according to the North’s success or failure at certain stages in the war. It took years to get all the foreign coins and competing for state currencies out of circulation. Bank notes had been in circulation all the time, but because banks issued more notes than they had coin to cover, these notes often traded at less than face value.

Commodity Money and Inflation

If economies are damaged too severely, then governments will step in to regulate the cryptocurrencies. The biggest problem with cryptocurrencies is that they do not solve an exigent problem. Most people are satisfied with fiat currencies and while financial transactions can be tracked, most people who are not criminals will not worry so much about that. This is one reason why organizations are required to report any cash transactions in excess of $10,000 in the United States to the IRS. Even though most people could use cash, most people choose to use credit cards and bank transfers because they are convenient, and they work well.

Although bitcoin has forked and will likely continue to, resulting in different types of bitcoins – such as Bitcoin XT and Bitcoin Cash – with varying quantities in circulation. Because stock market indices tend to rise over time, the stock market is considered a store of value. Gold, silver, and other commodities have value, and while these values fluctuate, they are considered a store of value.

  • 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.
  • The Gold Standard was the predominant monetary system in the west for the 50 years from 1870 to 1920, a system where legal tender was convertible into gold coin, and a period of unrivaled economic growth and stability.
  • But this could potentially be solved by investing in gold-backed assets like the gold-backed cryptos of Kinesis.
  • Commodity money has been used throughout history as a medium of economic exchange.
  • Imagine I am a musician-a bassoonist in an orchestra-who has a car that needs to be repaired.

The 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. 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. The collapse of the fiat currency remains a highly improbable event, except in the case of higher inflation.

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As the federal reserve controls the regulation of fiat currencies, XLM the shortage of money is an unlikely scenario. However, it may collapse to even zero in a rare case of a global recession. The federal reserve bank can generate an ample amount of fiat currencies.


M0 is the examples of commodity money 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. John then uses the $900 to purchase an iPhone from another customer, Betty. Furs and agricultural commodities such as maize were employed in trade transactions throughout the 17th and early 18th centuries. Gold has real intrinsic value – meaning that it is unlikely to ever collapse without value, which is precisely what has happened to every fiat money in history.

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