What Are The Advantages And Disadvantages Of Commodity Money?


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Tariq Habib answered
Money as a medium of exchange first came into human history in the form of commodities. A great variety of items have served as money at one time or another: cattle, olive oil, beer or wine, copper, iron, gold, silver, rings, diamonds, and cigarettes.

Each of the above has advantages and disadvantages. Cattle are not divisible into small change. Beer does not improve with keeping, although wine may. Olive oil provides a nice liquid currency that is as minutely divisible as one wish, but it is a bit messy to handle. And so forth.

By the nineteenth century, commodity money was almost exclusively limited to metals like silver and gold. These forms of money had intrinsic value, meaning that they had use value in themselves. Because money had intrinsic value, there was no need for the government to guarantee its value, and the market through supply and demand for gold or silver regulated the quantity of money. But metallic money has shortcomings because scarce resources are required to digit it out of the ground, moreover it might become abundant simply because of accidental discoveries of ore deposits.

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