41812 – A History of Commodity Money

Where the previous entry in this series examined the structural failures of pure barter — the double coincidence of wants, indivisibility, the absence of a common unit of account — this entry turns to the first systematic solution societies developed: commodity money, currency whose value derives from the intrinsic worth of the physical good itself. Before modern currencies existed, societies compensated for barter’s limitations by settling on shared, widely-tradeable commodities as a medium of exchange. The Massachusetts Bay Colony’s early years illustrate the problem commodity money solved: when the Puritans arrived in 1630, they initially relied on barter, but the system proved cumbersome and restricted trade. John Winthrop’s journal records merchants demanding “ready money” while colonists with real assets struggled to pay debts for want of anything both parties would accept.¹ This entry traces the diverse commodities different societies pressed into service as money, the properties that made some more durable as currency than others, and the eventual dominance of gold and silver that would carry through to the gold standard addressed later in this series.

This entry covers:

• The diverse commodities used as money across cultures and eras — cowrie shells, livestock, grain, salt, beads, textiles, and Rai stones
• The properties — durability, portability, divisibility, universal acceptability, scarcity, recognisability, and store of value — that determined which commodities succeeded as currency
• The trade, economic-development, and social-structure impacts of adopting commodity money
• The practical challenges and limitations of commodity money, and the factors behind the eventual dominance of gold and silver

This entry does not cover:

• The pre-commodity barter economy and its structural limitations → addressed in 41811
• Paper-based representative money and its departure from direct commodity backing → addressed in 41813
• The uncoupling of currency from the gold standard → addressed in 41814
• How money is created in the modern banking system → addressed in 41815

Certain properties determined which commodities succeeded as durable, reliable forms of money:

Commodity money’s earliest documented regulatory interventions were emergency and standardisation measures by colonial and early-modern authorities, rather than the codified national and international instruments seen later in this series (from 41814’s uncoupling from the gold standard onward). The Massachusetts Bay Colony provides one of the clearest early examples: facing a chronic shortage of currency, the Massachusetts Bay General Court took direct legislative action, declaring musket balls legal tender in 1635 and, in 1642, establishing standard prices for various commodities to facilitate trade and tax payments.¹ These were not abstract policy choices — they were a governing authority formally designating specific physical goods as money and fixing their exchange value by law, arguably the earliest form of monetary governance recorded in the English colonies.

This pattern — governments formally recognising and standardising particular commodities as legal tender — recurred across the eras and cultures surveyed in this entry, and became progressively more centralised as gold and silver rose to dominance. The eventual codification of a fixed exchange rate between currency and a specific weight of gold, the gold standard, represents the direct legal-and-regulatory descendant of these earlier commodity-standardisation measures, and is addressed in full in 41814.²⁴

Commodity money facilitated trade by providing a standardised medium of exchange, overcoming the limitations of barter and enabling more efficient and complex economic transactions.¹⁵ The use of durable and portable commodity money, like gold and silver, contributed to the growth of trade networks and the accumulation of wealth, stimulating economic development.¹⁶ Commodity price movements continue to echo through modern economies in the same basic way: softer commodity prices can ease inflationary pressures, as observed in recent years of global disinflation.¹⁷

Commodity money also reshaped social hierarchies and power dynamics. Control over valuable commodities like gold and salt often conferred power and status.¹⁸ In ancient civilisations, control over salt production frequently concentrated wealth and power in the hands of ruling groups or those who controlled trade routes, letting them exert influence, levy taxes, and maintain social order. Access to gold and silver mines played a similarly significant role in shaping power dynamics throughout history, contributing to the rise and fall of empires and influencing international relations.

The impact of commodity money was not uniformly positive. Fluctuations in the supply of or demand for the underlying commodity could produce economic instability, inflation, or deflation.¹⁵ Several structural weaknesses recurred across commodity-money systems: perishable commodities like grain or livestock were susceptible to spoilage, limiting their long-term use as money; some commodities were difficult to divide into smaller units, hindering small transactions; the quality of a given commodity could vary, making a consistent standard of value hard to establish; and bulky commodities like livestock or grain were expensive and impractical to transport.¹⁹ Supply shocks compounded these problems — a sudden increase in the supply of a commodity used as money could produce inflation and erode purchasing power, while scarcity could cause deflation and social unrest. The influx of silver from the Americas into Europe in the 16th century, which contributed to significant continent-wide inflation, is a well-documented historical example.¹⁵

Among the many commodities pressed into service as money, gold and silver eventually emerged as dominant because they possessed all the key properties of successful commodity money — durability, portability, divisibility, scarcity, recognisability, and store of value — and carried intrinsic value beyond their monetary use, in jewellery, ornamentation, and industrial application.²⁰ Their association with wealth and power stretches back millennia, reinforcing their acceptance as money over successive civilisations.²¹ Their dominance was not without friction: in bimetallic systems using both gold and silver, Gresham’s Law — “bad money drives out good” — frequently took hold, as people held back the more valuable metal and spent the less valuable one, creating shortages of the more valuable currency and instability in the monetary system.²² Even so, the use of gold and silver as standardised currencies facilitated international trade and the growth of global trade networks,²² while control over gold and silver mines and trade routes conferred significant economic and political power, shaping global power dynamics and contributing to colonialism and conflict.²³ The eventual codification of this dominance — currencies formally pegged to a fixed amount of gold — would underpin international finance for the best part of a century, and is where the next entry in this series, on representative money, and the one after it, on the birth of FIAT, pick up the story.²⁴

1. Commodity Money: Introduction — Coin and Currency Collections
2. Cowrie Shells and Trade Power — National Museum of African American History and Culture
3. Cowries, the currency that powered West Africa — ADP ReThink Q
4. The History of Money — NOVA, PBS
5. Cows as Currency — Story Archaeology
6. History of Money — The Perfect Currency
7. The History of Money: Part 1 — The Smarter Merchant
8. The Role of Salt in Human History — University of Hawaiʻi, Mānoa
9. History of Salt — HowStuffWorks
10. Trade beads — Wikipedia
11. History of Beads in Africa: An Overview — The Bead Chest
12. When Cloth Was Money, Literally — Reason Magazine
13. When Cloth Was Money, Literally (cont.) — Reason Magazine
14. Determining the Value of Textiles in the Tang Dynasty — Journal of the Royal Asiatic Society
15. Gold, Silver, and Monetary Stability — IMF
16. The Impact of Commodity Market on the Economy of Developing Countries — Munich Personal RePEc Archive
17. How Commodity Prices Can Impact the Market and Inflation — U.S. Bank
18. Social Consequences of Changes in the Value of Money — The Economics Network
19. What is Commodity Money? — Yieldstreet
20. Why is Gold a Valuable Commodity? — Sharps Pixley
21. Gold, Silver, and Monetary Stability — IMF
22. Gold, Silver, and Monetary Stability — IMF
23. A Glittering Investment: Understanding the Economics of Gold and Silver — SCORE.org
24. Why Gold and Silver Backed Up Our Currency — YouTube