What Is Commodity Money and Is It Still Used? + Examples

Money makes the world go round, but not all money is the same. Today, most of us deal with digital numbers on a bank app or paper bills in our wallets, but there was a time when commodity money was the dominant form of currency around the world. Sometimes, it can be difficult to grasp why money has value in the first place.

To try to answer that question, we need to go back in time and look at commodity money. Monetary and economic systems evolve over time, but they are all built atop one another. So, to truly understand how the current fiat money system works, we need to know what it evolved from.

Understanding what commodity money is, how it works, why it was used, and whether it still has a role in modern economies can help you see money in a whole new light.

What Is Commodity Money? Definition

Let's start by addressing what is meant by commodity money, exactly. The concept of commodity money is simple: it’s money that has inherent, intrinsic value because it’s made from something valuable in itself. Commodity money is a physical asset – you can see it, hold it, touch it. Think of gold coins, silver bars, or even salt in ancient times.

Let's start by addressing what is meant by commodity money, exactly. The concept of commodity money is simple: it’s money that has inherent, intrinsic value because it’s made from something valuable in itself. Commodity money is a physical asset – you can see it, hold it, touch it. Think of gold coins, silver bars, or even salt in ancient times

Unlike fiat money (which has value only because a government declares it legal tender), commodity money’s value comes from the tangible asset it’s made of. Gold coins were commodity money because the gold had intrinsic value – if the coins were melted down, the gold would still retain its value and could be used for production, i.e., making jewelry, giving it its intrinsic value.

So, we could define commodity money as a medium of exchange where the “money” itself is a physical asset that people value even outside of its role as money. But we should backtrack a bit here – what is money? Money can be defined as an asset that is accepted as a medium of exchange for goods or services. The value of that asset can and was determined by many different factors, but it often boiled down to a commonly recognized value by the people who use it.

This takes us to...

History of Commodity Money

The history of commodity money goes back thousands of years, long before the invention of paper currency or digital assets. In early societies, trade began with a barter system, where goods were exchanged directly for other goods. But barter had problems – matching needs (“I have wheat, you have cattle”) was inefficient. People soon realized that some goods were more universally desired and durable than others. So, bartering basically faced four challenges

1. Portability;
2. Convertibility;
3. Divisibility;
4. Perishability.

Precious metals like gold and silver became favored for trade because they were portable, divisible, and didn’t spoil. This marked the shift from barter trade to using commodities as money. Ancient civilizations such as the Romans used gold and silver coins as their official currency. Over centuries, the gold standard evolved, linking a country’s government-issued currency directly to a specific quantity of gold.

Under this system, paper bills were essentially representative money – redeemable for the gold they promised to represent. In that context, there are three primary categories or types of money we know today (the latter two will be discussed in more detail later):

• Commodity money
• Representative money
• Fiat money

Features of Commodity Money

Several key characteristics of commodity money set it apart from modern fiat currency:

1. Intrinsic Value – The value comes from the commodity itself, whether gold, silver, or another valuable good.

2. Durability – It doesn’t degrade quickly (precious metals can last indefinitely).

3. Divisibility – Can be split into smaller units without losing value.

4. Portability – Easier to carry than bulky goods like livestock.

5. Universally Accepted – Widely recognized and trusted across regions.

This trust in commodity money was a major reason it became the backbone of early currency systems and international trade.

Commodity Money Examples

Throughout history, different societies have used many forms of commodity money for goods or services, including:

• Gold coins – Used in ancient Rome, medieval Europe, and modern economies until the 20th century.

• Silver coins – Common in trade throughout Asia and the Americas.

• Salt – So valuable in ancient Rome, it inspired the word “salary.”

• Cattle – A measure of wealth in early agrarian societies.

• Spices – Used in trade routes between Asia, Africa, and Europe.

• Cocoa beans – Used as currency by the Aztecs and other Mesoamerican civilizations.

• Tobacco – Accepted as payment in colonial America.

• Gold bullion – Still valued today as a safe-haven asset in times of crisis.

Even beaver pelts were the main unit of exchange in the area around Hudson’s Bay in Canada for fur traders in the 18th century. The First Nations were not interested in exchanging goods for precious-metal coins, so they needed to find another medium of exchange. They even had an exchange rate set up, e.g., 5 pounds of sugar were worth 1 beaver pelt while 1 gun cost 12 beaver pelts.

These examples illustrate that commodities can be anything people agree on as valuable – whether for survival, luxury, or trade.

Two Other Primary Types of Money: Representative and Fiat Money

To reiterate, commodity money is money that has intrinsic value due to the commodity of which it is made. But there are also two other primary categories of money: representative and fiat.

Commodity vs. Representative Money

A key part of monetary history is the move from commodity money to representative money – paper notes backed by a commodity. Representative money is when the value of the money is backed by an underlying commodity that has intrinsic value, and where the unit of money can be exchanged for the underlying commodity via a formal process, but where the unit of money has no intrinsic value itself.

For example, paper money backed by gold and exchangeable for it at a fixed rate is representative. So, a paper bill represents (and can be exchanged for) the equivalent value of the gold that backs it. While the US was under the gold standard, the USD was a form of representative money, and paper bills could be exchanged for gold at a fixed rate.

Fiat vs. Commodity Money

The fiat vs. commodity money debate centers on the source of value. Fiat currency (like the U.S. dollar or euro) has no intrinsic value; it’s worth something only because the government says it is and people trust it. By contrast, commodity money is valuable regardless of government backing. If the government vanished tomorrow, gold coins would still hold value because they are a form of asset people desire (as long as they do, of course).

However, fiat money gives governments and central banks more flexibility in monetary policy. They can adjust the money supply to meet economic demands, stimulate growth, or maintain price stability. With commodity money, the money supply is tied to the amount of the commodity available, which can limit government policy options during economic crises.

Almost all modern currencies, from the Chinese yuan to the Brazilian real, are considered fiat money.

Why Commodity Money Declined

The transition away from commodity money began in the 20th century. The gold standard was gradually abandoned, with the U.S. officially ending it in 1971. Reasons for the decline included:

• Economic flexibility – Tying money to gold limits a nation’s ability to respond to financial crises.

• Volatility of commodity prices – The value of money could change based on fluctuations in gold or silver prices.

• Economic stability concerns – Large gold discoveries or shortages could cause inflation or deflation.

• Growth of international trade – Modern economies needed faster, more adaptable money systems than gold-based currency allowed.

Is Commodity Money Still Used Today?

In modern times, it may seem like commodity money is a historical occurrence, given that almost all countries use representative or, more commonly, fiat money. But that is actually not the case – commodity money can exist alongside other money categories. While commodity money is no longer the official currency in most countries, it hasn’t disappeared entirely.

Cigarettes are a common form of commodity money when other types of currency are prohibited. For example, they were often used in prisons in the US as a unit of exchange before smoking was banned in prisons in the early 2000s.

• Gold bullion and coins are still bought and sold worldwide.

• Some countries issue commemorative gold coins with real precious metal value, such as proof coins.

• Certain economies with unstable government-issued currency see people turn to gold, silver, or other physical assets as stores of value.

• Commodity currencies (like the Canadian or Australian dollar) are not commodity money themselves but are heavily influenced by commodities in money exports, such as oil or minerals.

• In times of political unrest or currency devaluation, people often switch savings into safe-haven assets like gold.

While the line where a commodity becomes a currency can be debated, generally speaking, whenever a single commodity is recognized by a population as a unit of exchange for goods or services, it can be considered commodity money.

Commodity Money in Modern Investment & Economic Stability

Even if it’s not the backbone of the global currency systems anymore and modern economies depend on government-issued currency, commodity money still influences traditional investments, portfolio of assets, and speculative investment practices. Gold, silver, and other commodities are often part of a diversified portfolio as art investment options, safe-haven assets, or hedges against inflation.

In the international market, gold is still viewed as a benchmark of wealth and stability. Central banks themselves hold large reserves of gold as part of their maintenance of price stability strategies. For example, during inflationary periods, gold prices often rise, acting as a signal to central banks and investors about public confidence in the economy.

One reason people still respect commodity money is that commodity money anchors value in a tangible, universally accepted standard. Unlike a purely digital number in a bank account, gold in your safe can’t be erased by a software glitch or government decision. This psychological and historical weight means that even in an age dominated by digital assets, many people still trust gold or silver more than the promises of a bank or government. 

Pros and Cons of Commodity Money

To sum all of this up, here's a breakdown of commodity money's benefits and downsides. 

Advantages:

• Intrinsic value means it holds worth beyond its role as money.

• Resists currency devaluation caused by overprinting.

• Historically proven as a store of value.

• Useful in international trade where trust in foreign government policy may be low.

Disadvantages:

• Limited supply can hinder economic policies in times of crisis.

• Susceptible to swings in commodity prices.

• Inconvenient for daily use compared to paper currency or digital payments.

• Harder to transport in large amounts compared to forms of money like bank transfers.

Future Outlook: Will Commodity Money Ever Return?

Given the rise of digital assets, the return of commodity money as one of the mainstream forms of currency is unlikely. However, commodities, especially precious metals, will remain important forms of assets for wealth preservation.

In countries experiencing extreme currency devaluation, citizens often revert to gold or silver as a reliable store of value. In that sense, commodity money never fully disappears; it simply shifts between being a daily medium of exchange and a long-term safeguard.

Commodity money might be a relic of the past in terms of daily spending, but it’s far from irrelevant. Whether in the form of gold bars in a vault or precious metals in a diversified portfolio of assets, it continues to influence currency systems, shape government policy, and anchor trust in money itself.

Exchange Fiat Money Online

Although commodity money still sees use in specific instances, the primary medium of exchange for goods or services in the current era is fiat money. And US First Exchange can help you exchange it with peace of mind. With us, you can buy or sell over 20 different currencies, including exotic ones like the Iraqi dinar or Vietnamese dong.

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