Commodity money

Precious metals have been a common form of money, such as this gold from Sveriges Riksbank.

The first instances of money were objects which were useful for their intrinsic value. This was known as commodity money and included any commonly-available commodity that has intrinsic value; historical examples include pigs, rare seashells, whale's teeth, and (often) cattle. In medieval Iraq, bread was used as an early form of currency.

Spices have been used as commodity money for long. Definite indications are available that both black and white pepper have been used as commodity money for hundreds of years before Christ, as also several centuries thereafter. Being a valuable commodity, pepper has naturally been used as payment. Attila the Hun reportedly demanded 3, 000 pounds in weight of pepper in 408 AD as part of a ransom for the city of Rome. In the Middle Ages, there was a French saying, 'As dear as pepper'. In England, rent could be paid in pounds of pepper, and so a symbolic minimal amount is known as a " peppercorn rent".

Even in the industrialised world, in the absence of other types of money, people have occasionally used commodities such as tobacco as money. This last happened on a wide scale after World War II when cigarettes became used unofficially in Europe, in parallel with other currencies, for a short time.

Another example of " commodity money" is shell money in the Solomon Islands. Shells are painstakingly chipped into rough circles, filed down, and threaded onto large necklaces, which are then used during marriage proposals; for instance, a father may charge twenty shell money necklaces for his daughter's hand in marriage.

One interesting example of commodity money is the huge limestone coins from the Micronesian island of Yap, quarried at great peril from a source several hundred miles away. The value of the coin was determined by its size — the largest of which could range from nine to twelve feet in diameter and weigh several tons. Displaying a large coin, often outside one's home, was a considerable status symbol and source of prestige in that society. (Due to the great inconvenience, islanders would often trade only promises of ownership of an individual coin instead of actually moving it. In some cases, coins which had been lost at sea were still used for exchange in this way. These agreements could be thought of as a kind of representative money, described below.)

An 8-foot " coin" from the village of Gachpar, on Yap.

Once a commodity becomes used as money, it takes on a value that is often a bit different from what the commodity is intrinsically worth or useful for. Being able to use something as money in a society adds an extra use to it, and so adds value to it. This extra use is a convention of society, and how extensive the use of money is within the society will affect the value of the monetary commodity. So although commodity money is real, it should not be seen as having a fixed value in absolute terms. Its value is still socially determined to a large extent. A prime example is gold, which has been valued differently by many different societies, but perhaps none valued it more than those who used it as money. Fluctuations in the value of commodity money can be strongly influenced by supply and demand whether current or predicted (if a local gold mine is about to run out of ore, the relative market value of gold may go up in anticipation of a shortage).

Money can be anything that the parties agree is tradable, but the usability of a particular sort of money varies widely. Desirable features of a good basis for money include being able to be stored for long periods of time, dense so it can be carried around easily, and difficult to find on its own so that it is actually worth something. Again, supply and demand play a key role in determining value.

Metals like gold and silver have been used as commodity money for thousands of years, being in the form of metal dust, nuggets, rings, bracelets and assorted pieces. Eventually the Lydian’s began coining gold and silver around 650BC.

Gold and silver are both quite soft metals, and coins minted from the pure metals suffer from wear or deformation in daily use. Fortunately these metals are also easily alloyed with a less expensive metal, frequently copper, in order to improve the durability of the resulting coins. Typically alloys of coinage metals, such as sterling silver or 22 carat gold, are used to make coins more durable. These are alloys of 90% or more precious metal as alloys of less than 90% do not improve hardness or durability very much, and so are typically considered to be on the slippery slope into monetary debasement.

Standardized coinage

A Roman denarius, a standardized silver coin.

It was the discovery of the touchstone that paved the way for metal-based commodity money and coinage. Any soft metal can be tested for purity on a touchstone, allowing one to quickly calculate the total content of a particular metal in a lump. Gold is a soft metal, which is also hard to come by, dense, and storable. For these reasons gold as a money spread very quickly from Asia Minor where it first gained wide use, to the entire world.

Using such a system still required several steps and some math. The touchstone allowed you to estimate the amount of gold in an alloy, which was then multiplied by the weight to find the amount of gold alone in a lump.

To make this process easier, the concept of standard coinage was introduced. Coins were pre-weighed and pre-alloyed, so as long as you were aware of the origin of the coin, no use of the touchstone was required. Coins were typically minted by governments in a carefully protected process, and then stamped with an emblem that guaranteed the weight and value of the metal. It was however extremely common for governments to assert that the value of such money lay in its emblem and to subsequently debase the currency by lowering the content of valuable metal.

Although gold and silver were commonly used to mint coins, other metals could be used. Ancient Sparta minted coins from iron to discourage its citizens from engaging in foreign trade. In the early seventeenth century Sweden lacked more precious metal and so produced " plate money, " which were large slabs of copper approximately 50cm or more in length and width, appropriately stamped with indications of their value.

Metal based coins had the advantage of carrying their value within the coins themselves — they induced on the other hand manipulations: the clipping of coins in attempts to get and recycle the precious metal. The bigger problem was the simple co-existence of gold, silver and copper coins in Europe's nations. English and Spanish traders valued gold coins at a higher rate of silver coins than their neighbours would do, with the effect that the English gold-based guinea coin began to rise against the English silver based crown in the 1670s and 1680s and with the consequence that silver was ultimately pulled out of England for dubious amounts of gold coming into the country at a rate no other European nation would share. The effect was worsened with Asian traders not sharing the European appreciation of gold altogether — gold left Asia and silver left Europe in quantities European observers like Isaac Newton, Master of the Royal Mint observed with uneasiness.

Stability came into the system with national Banks guaranteeing to change money into gold at a promised rate, it did, however, not come easily. The Bank of England risked a national financial catastrophe in the 1730s when customers demanded their money to be changed into gold in a moment of crisis. Eventually London's merchants saved the bank and the nation with financial guarantees.