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Commodity money

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Commodity money refers to money whose value comes from a commodity which underlies it. Examples of commodities that have been used as money include gold, silver, copper, salt, large stones, shells, and cigarettes. Commodity money is to be distinguished from representative money which is a certificate or token which can be exchanged for the underlying commodity. It is not necessary for the commodity itself to have any intrinsic value although it is necessary that the commodity be somewhat scarce.

In situations where the commodity is metal, a government mint will often coin money by placing a mark on the metal that serves as a guarantee of the weight and purity of the metal. In doing so, the government will often impose a fee which is known as seigniorage. The role of a mint and of coin is different between commodity money and fiat money. In situations were there is commodity money, the coin retains its value if it is melted and physically altered, while in fiat money it does not.

Commodity money often comes into being in situations where other forms of money are not available. Various commodities were used in pre-Revolutionary America including indian corn, iron nails, beaver pelts, and tobacco. In post-war Germany, cigarettes became used as a form of commodity money in some areas.

Although commodity money is more convenient than barter, it can be inconvenient to use as a medium of exchange[?] or a standard of deferred payment[?] due to the transport and storage concerns. Accordingly, notes began to circulate that a government or other trusted entity (e.g. the Knights Templar in Europe in the 13th century) would guarantee as representing a certain stored value on account. This creates a form of money known as representative money.

see also fiat money, trade, natural capitalism

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