Commodity money

A commodity is any good or service that is useful as an input in production or con- sumption and can be exchanged with other goods or services. The exchangeability of commodities presupposes the existence of a common element that makes them commen- surable to each other. Classical economists argued that the common element contained in commodities is that they are products of labour. Hence, the quantity of labour time spent to produce any commodity becomes the measurement stick of its worthiness. Of course, there are differences and qualifications within this broad classical approach. For example, Marx's concept of abstract socially necessary labour time - that is, the labour time without its specific characteristics - is what gives worthiness to commodities.

Historically certain commodities, owing to certain useful attributes they possessed, became money commodities; that is, the means through which the other commodities can express their worthiness and in doing so become the medium for quoting prices. If gold, for example, is the money commodity, the other commodities express their worthiness in terms of a certain quantity of gold (for example, 1 US dollar 5 1/4 ounce of gold). The value - to wit, the abstract socially necessary labour time - contained in a commodity, relative to the value of gold, gives the direct price or a first approximation of the monetary expression of value and a centre of gravity for observed (market) prices (Shaikh, 1980).

The function of money as a standard of price refers to the particular unit of gold that is used to measure value. As a result, the measure of value and standard of price functions are not the same. The measure of value is the abstract socially necessary labour time contained in a commodity. The standard of price is a unit of weight (pound, gram, and so on). It is similar to the difference between distance and a meter. A meter is a unit of measurement and distance is the concept to be measured in meters. Historically, for instance, the British pound initially represented a quantity of silver weighing one pound (Marx, 1867, p. 99), and the US dollar also represented a certain weight of silver. With the passage of time, however, debasement separated the money names of these units from their actual precious metal content and gradually led to the determination of the standard by law.

The measure-of-value property of the money commodity may also make it the medium of exchange and thereby enable the generalization of commodity production, thus making possible the increasing specialization of labour and the associated increase in productiv- ity and reduction in unit production costs and prices. History is replete with examples of commodities that played the role of money commodity. For example, in ancient times cattle, salt and copper, among other goods, served as mediums of exchange, and in more recent times even commodities such as cigarettes, under certain circumstances (such as in a prisoner-of-war camp), have also played that role. However, the money commodity in an economy of generalized market relations must possess the universal function of the general equivalent - that is, it must be the commodity through which the other commodi- ties express their value - and so it must be characterized by a number of useful properties (it must be easily recognizable, divisible, transferable, durable, and so forth). Precious metals, more than other commodities, possess these required properties and for this reason have become the means that can effectively perform the functions of the universal or general equivalent commodity.

Fiat money is a form of money without intrinsic value and is instituted as such by the State. Contrary to commodity money, fiat money is exchanged against commodities (or gold) at the market price, whereas token (commodity) money is converted into gold at a specified price. Commodity money in the form of gold coins appeared for the first time in the sixth century BC in Greece and Asia Minor, and approximately in the same period in East Asia.

In modern times, fiat money in its paper or more importantly in its bookkeeping form renders commodity money literally a "barbarous relic" according to Keynes's characteri- zation of money backed up by gold. On further thought, however, commodity money, in one form or another, was officially present up until 1971, when the currencies of IMF member countries (according to the Bretton Woods agreements signed in 1944) were con- vertible into US dollars and US dollars in principle were convertible into gold at the ratio of 35 US dollars to an ounce of gold. To the extent that economies were in a growing stage, there were no problems with the extension of credit and the expansion of forms of fiat or quasi-fiat money. However, in a long-lasting recessionary period (such as the period that started at the end of the 1960s and lasted until the early 1980s) the function of money as a store of value requires more urgently the physical presence of money and this could not be different from its commodity form. As a result, Germany and France, two countries with persistent trade surpluses with the United States, already from the late 1960s demanded the exchanging of their surplus US dollars either in their own currency (marks and francs, respectively) or even better in gold. The running down of US gold and foreign-exchange reserves led the US government in 1971 to formally terminate the Bretton Woods agreements.

The concept of commodity money is present in the writings of the classical econo- mists (Smith, Ricardo, J.S. Mill, Marx, inter alia). Their main idea is that the price of each commodity is determined by the ratio of the value of this commodity to the value of the money commodity/gold times the mint price of gold. This product multiplied by the quantity of commodities over the velocity of circulation gives the quantity of money necessary for circulation (Shaikh, 1980). Inflationary periods like that of the second half of the sixteenth century have to do with excess profits in gold production, which led to its more intensive production, discovery of new gold mines, the increase in the supply of gold and the lowering of its value leading to higher prices (see Foley, 1986, ch. 2).

See also:

Bretton Woods regime; Fiat money; Marx, Karl; Metallism.