Commodity Money

Commodity money may be an archaic thought in a world with debit cards, credit cards, and paper bills, but a resurgence in gold and silver backed money spread that spread around the world following the financial crisis of 2008 created renewed interest in commodity money. In very simple terms, commodity money is any unit of exchange that is intrinsically backed by ownership of something tangible, often precious metals.

Most commodity money advocates argue that by backing a currency with commodities, especially rare precious metals, that the price of a currency can be protected. The very simple argument follows the logic that creating a lot of paper money is very easy. To produce a $100 US bill, for example, costs the government only $.03 in land, labor, paper, and distribution. With that understanding, it would be possible for the US Government to print one $100 bill, then buy materials sufficient to produce 3,000 more $100 bills, which could then produce 300,000 more $100 bills, and so on and so forth.

By requiring that the price of a currency is tied to the value of a commodity, making money so irresponsibly is a risk obviously averted. Where paper money can be made infinitely with printing presses, mining more gold, silver, copper, or whatever commodity that becomes the chosen commodity, isn’t easy. To mine $100 of gold requires far more in costs than just $.03.

Using commodity money also means that the wealth of each person is not tied to government. That is, an ounce of gold in the United States is worth as much as an ounce of gold in Australia, and regardless of what happens to any currency around the world, gold will still retain its “intrinsic” value.

Commodities as Money
There is a long-standing tradition that says precious metals are money, but other commodities have been considered money in the past, as well. At one time, seashells, corn, word cutouts, and even commodities like cotton or dried meat were used as a currency in commerce.

There are some difficulties in making a commodity-backed currency. For one, the country has to have sufficient stockpiles, or the ability to find these stockpiles to produce a currency. With paper, which is very inexpensive, finding the materials necessary to make bills is as easy as locating the nearest tree.

In terms of monetary policy, critics of commodity money note that it was commodity money that made the Great Depression in the United States such a monstrous event. Saddled with the impossibility of finding more gold at the mandated price of $20.17 per ounce, the Federal Reserve could not begin quantitative easing, or pro-inflation policies, to offset the general decline in economic activity. Commodity money advocates might argue that it was the move toward a currency not backed by gold that started the Great Depression through fractional-reserve banking.

The Debate on Commodity Money
The debate for gold and silver backed currencies has taken all shapes and forms. Some see gold and silver as the next natural step for money, seeing as both were used interchangeably in differing forms leading up to the creation of the Federal Reserve in 1913.

This debate is sure to continue in its veracity as each side meshes out exactly what the role of government in money ought to be, and how changes to currency could better enable the economy to do what it does best: grow.

Perhaps the best argument for commodity money has been in the few pieces of commodity money that exist to this day. US one dollar coins dating back to the 1920’s Peace Dollars contain roughly 2/3rds of an ounce of silver. At the time of writing, two thirds of an ounce of silver is worth nearly $40, while the dollar is still worth exactly one dollar. In terms of savings, that difference is huge, though the argument can be made, also, that most people earn significantly more today, as well, negating the decline on a per-dollar basis.

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