What are the problems with commodity money?
One of the major problems with commodity money was quality. Individuals tended to use or sell their best products while their poorest products would be offered as commodity money. Additionally, even good quality commodities would deteriorate if retained too long.
Commodity money is money that has intrinsic value, meaning that it has value even if it is not used as money. Examples of commodity money include precious metals, foodstuffs, and even cigarettes.
Disadvantages of commodity-backed money
Commodity-backed money can limit a government's ability to manage its currency in response to economic changes as the value of the currency is directly linked to the value of the physical commodity. Vulnerability to supply shocks.
Long ago, people in the U.S. used commodity goods such as salt and rice as money. Because these items weren't always easy to carry and could go bad after a while, we eventually changed to using coins, made of precious metals.
| Pros | Cons |
|---|---|
| Can generate short-term profits | Extreme volatility |
| A hedge against inflation | Long periods of declining prices |
| Diversification benefits | Holding physical commodities may incur storage fees |
| Commodities don't generate income for investors |
What is one problem for "one-commodity" countries? the prices vary and if they drop, the country will suffer and have no income from other commodities to offset the loss.
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.
Examples of commodity money are gold and silver coins. Gold coins were valuable because they could be used in exchange for other goods or services, but also because the gold itself was valued and had other uses. Commodity money gave way to the next stage-representative money.
With commodity money it is very difficult for your money to loose all of its value as the commodity itself will always retain some value. Of course it is also much easier for the value of the money to change. If the amount of the commodity in circulation changes the value of the money changes.
2. It affects economic performance and exposes countries to shocks. Commodity-dependent countries often grapple with issues like slow productivity, income volatility, overvalued exchange rates, and increased economic and political instability.
What is a disadvantage of investing in the commodities market?
High volatility.
Although the price of raw materials depends on supply and demand, both supply and demand are affected by external factors such as natural phenomena or political circ*mstances that abruptly alter the prices of raw materials.
If a gold coin is produced, its worth would be determined by the price of gold rather than by its face value. Commodity money was created as a practical means of exchange because it outperformed the barter trading system. The disadvantage of commodity money is that it faces a lot of fluctuations in price.
Today, U.S. bills are backed by the Federal Reserve, but as fiat money. As economies grew and became more global in nature, the use of commodity monies became more cumbersome. Countries moved toward the use of fiat money. Fiat money is legal tender whose value is backed by the government that issued it.
Fiat money is a government-issued currency that is not backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Most modern paper currencies, such as the U.S. dollar, are fiat currencies.
Why would commodity money be hard to use in most societies? It is often not portable, durable, or divisible.
A fall in own price of the commodity leads to increase in real income of the consumer and a consquent increase in purchasing power of the consumer.
Commodities include agricultural products such as wheat and cattle, energy products such as oil and natural gas, and metals such as gold, silver and aluminum. There are also “soft” commodities, or those that cannot be stored for long periods of time, which include sugar, cotton, cocoa and coffee.
Commodity-dependent countries experience more economic vulnerability, environmental degradation, and labor exploitation. Venezuela is an example of commodity-dependent country as it has long been reliant on oil revenues.
Commodity currencies are most prevalent in developing countries (eg. Burundi, Tanzania, Papua New Guinea). In the foreign exchange market, commodity currencies generally refer to the New Zealand dollar, Norwegian krone, South African rand, Brazilian real, Russian ruble and the Chilean peso.
Explanation: Teeth is not commodity money. A bronze okpoho or manilla, the traditional commodity money in West Africa until the 1940s. Commodities often come into being in situations where other forms of money are not available or not trusted, and these are social norms.
What is commodity money also known as?
Commodity money is also know as standard money because it is the monetary unit which is approved by the government to act as the legal tender in the currency system and in which other types of money in the economy like bank draft, promissory not etc. is convertible.
Glass beads: Gold: has been widely used as a form of commodity money across different civilizations and time periods. Its scarcity, durability, and desirability have made it a valuable medium of exchange. Silver: similar to gold, silver has also been used as commodity money.
Gold coins are the best example of commodity money. Commodity money is an asset that is backed by a specific commodity.
Yes, they are. Cash commodities are also sometimes referred to as actuals.
Commodities are a popular investment for adding diversity to a portfolio, and hedging against rising inflation and stock market volatility. You can invest in commodities through futures contracts, commodity stocks or ETFs. Connor Emmert is a former NerdWallet writer and an authority on investing.
