What is Commodity Money?

Key Highlights

• Commodity money is a physical item like gold or silver that has its own natural value, beyond just being used for buying and selling things.

• Since the U.S. dollar is not backed by gold anymore, it doesn’t have value on its own, which can make it less stable than physical valuables like gold during economic troubles.

• Commodity money has been used throughout history and is still in use in certain circumstances.

Commodity money’s primary value is in its intrinsic value. This form of money consists of physical items that have a value or utility other than as a form of exchange medium.

Commodity money was thought to be first used in ancient days when trade, exchange, and economic activity in general were less sophisticated. People would use various goods to buy things and even to satisfy obligations. In that way, the practice of bartering introduced commodity money, in which specific items are given value. That evolved into today’s currency systems.

Historically, examples of commodity money include gold, silver, tea, alcohol, and seashells. Even if no one would accept such goods as trade, the owners could still use them for their purposes.

At length, though, commodity money became unfeasible largely due to issues with perishability, indivisibility, and heterogeneity. For example, because many items could not be kept for a long time, people were unable to repay loans or save them for future needs.

The following explores commodity money and its importance in investing, business, and finance.

What is Commodity Money?

Commodity money has worth independent of its use as money. By contrast, other forms of money, such as U.S. currency, get their value solely from the trust placed in it.

For example, while gold was used thousands of years ago as a common form of money, the precious metal was also used to craft jewelry. Thus, it had value beyond its use as an exchange medium. Other historic examples of commodity money include alcohol, tobacco, salt, cocoa beans, and soybeans.

During periods of economic upheaval, such as hyperinflation or severe depression, investors have been known to prioritize commodity money over the money their governments authorize. Commodity money is also more likely to experience deflation – a drop in general price levels, including those of assets. Deflation hedges often include cash, dividend-paying stocks, and cash.

What are the Characteristics of Commodity Money?

The major features of commodity money include:

• Measurability. Money must be measured so that people can assess how much they are willing to pay. If the sole note in circulation was a $100 note, for example, it would likely be very difficult to purchase items that cost a dollar or two.
• Durability. The commodity’s intrinsic value must be retained for trust in it to endure. For example, iron rusts easily, so it would not work as a commodity. Neither would meat since it spoils over time.
• Exchangeability. Commodities that have historically caught on are convenient and easily traded. It is obviously easier and more inconvenient to take gold coins to market instead of, say, cows.
• Rarity. Commodity money must be rare in that the supply is limited. Otherwise, unlimited amounts of money would result in massive inflation levels. Still, the commodity supply must be able to respond to heightening demand when stability returns.

Why is Commodity Money Valuable?

Money’s value is solely determined by the utility attributed to it by community or society consensus, while commodity money has underlying value. However, commodity money does risk widespread price fluctuations due to commodity price changes. For example, the discovery of a large cache of silver could result in a steep drop in the value of silver currency.

How Was Commodity Money Historically Used?

While it is virtually impossible to determine the genesis of commodity money, some records point to the period 700-500BC when electrum, an alloy of gold and silver, became a common form of money. Other evidence exists that dates commodity currencies back to ancient Egypt and Mesopotamia.

After World War II, gasoline and cigarettes were used as a form of commodity money in portions of Europe, including Belgium, France, and Germany.

Anthropologists and historians widely contend that commodity money evolved from a bartering system wherein participants accepted a common medium of exchange to enable transactions of goods and services.

Such a system was in place in 1630, when the Puritans first arrived on Massachusetts Bay. This markedly restricted trade, since two people seeking to do business had to possess equivalent parcels the other person desired and with which each person was willing to part.

To remedy the situation, the Massachusetts Bay General Court established standard prices for certain farm products and foodstuffs and passed a law that set limits on the price of farthings. Such products came to be called “country pay” and were ascribed specific rates so they could be used for tax payments.

A chief issue with commodity money was quality. People tended to utilize or sell their best products while offering their poorest goods as commodity money. Even some commodities of good quality would deteriorate if kept too long.

Another problem was transportation costs. Satisfying tax bills with barrels and bushels of produce required bringing the commodities to the colony treasury, a practice that became unsustainable. At length, it was clear that while commodity money worked to some extent, it became an undesirable way to conduct commerce.

Commodity Money Today

Commodity money continues to sporadically be used as currency, mostly in war-riven regions experiencing insufficient supplies of common goods combined with a monetary collapse. This occurred during the Siege of Sarajevo in 1993, for example.

And even today, central banks continue to hold gold as part of a diverse portfolio of assets that comprise their official reserves. Gold remains the ultimate commodity money.

Additionally, precious metals like gold and silver remain popular stores of value. Investors often turn to them as a hedge against inflation or during economic uncertainty. In other words, these commodities now serve as safe-haven assets as they are available through modern investment vehicles like gold ETFs and bullion.

Cryptocurrencies have revived debates about commodity-based value. Bitcoin, for instance, is often compared to gold due to its capped supply and decentralized system. Though digital, its scarcity gives it commodity-like characteristics, prompting some to call it “digital gold.”

Commodity Money vs. Fiat Money

Fiat money is a government-issued currency that is backed by the government, rather than a physical commodity with value on its own, such as gold or silver. Fiat money’s value derives from the issuing government’s stability as well as supply and demand – not from a commodity’s intrinsic worth.

Most major modern global currencies, including the U.S. dollar and euro, are fiat currencies. With fiat money, central banks have greater economic control because they can regulate how much money is printed.

A danger of fiat money, though, is that if too much is produced, it can result in hyperinflation. For example, in the early 2000s, Zimbabwe’s central bank began to print money at a rapid pace, in hopes of solving acute economic woes.

That caused hyperinflation, which drove prices upward across the board. The situation quickly deteriorated to the point where citizens had to carry bags of cash to market just for essentials. At one point, a single U.S. dollar was worth about some 8.31 billion Zimbabwean dollars.

Is Art Commodity Money?

While art has value, it is not a commodity in the sense that gold and silver are, for example. Art is not commodity money in today’s market.

However, investors can still get involved with art through alternative investments. In the last several years, fine art has become increasingly popular as an alternative way to mix up one’s investment portfolio.

Art and Alternative Investments

Art investments have demonstrated strong performance potential, delivering average returns of 11.5% and outperforming the S&P 500 with returns exceeding 360% over recent decades. This performance, coupled with art’s inflation-hedging properties, has sparked growing investor interest. A 2023 Deloitte survey revealed 63% of wealth managers already included art in their investment portfolios as investors request art investment options.

Investment professionals increasingly recommend diversifying beyond the traditional 60/40 stock-bond portfolio split. A more balanced approach incorporating 20-30% alternative assets—including art, real estate, private equity, digital assets, and collectibles—can help reduce portfolio sensitivity to market volatility.

While alternative investments traditionally required high minimums ($500,000 to $1 million) and were limited to wealthy individuals and institutions, new platforms like Willow Wealth now provide curated access to private markets for individual investors.   

Investors can get started with minimum investments as low as $5,000 for their first investment (subject to certain exceptions). Willow Wealth offers a curated selection of opportunities across multiple asset classes, ranging from individual investments to diversified funds and automated portfolio solutions. While these investments carry risk, they open the door to opportunities across real estate, private credit, private equity, and more.  

Join more than 500,000 members and start investing in private markets today at willowwealth.com. 

In Summary

The history of commodity money, its evolution, and how it relates to today’s currencies is important in investing, business, and finance. And while art is no longer used as commodity money, investors can still participate in the market through a fractional art program such as the one offered by Willow Wealth.

All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including the possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.