What are some disadvantages of commodity money?


Quick Answer

Indivisibility, perishability, tendency to fluctuate erratically and variations in quality are some disadvantages of commodity money. Commodity money is any form of currency that can serve another purpose apart from its use as money. Examples of commodity money include maize, cattle, gold, silver and olive oil.

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Full Answer

Precious metals such as gold and silver were the most commonly used forms of commodity in the ancient times. Gold and silver were highly preferred because they had an intrinsic value, and were widely accepted as a means of exchange. Gold and silver coins were first used in the city-state of Lydia in the beginning of 17th century. The coins were made from electrum, a natural mixture of silver and gold.

Other forms of commodity money such as cattle, maize, beer, olive oil and other metals were also used, but they were inefficient. For instance, cattle were not divisible into smaller units, while some forms of metals were bulky and difficult to transport long distances.

Another disadvantage of commodity money is that it may vary in quality. Due to variations in quality, lower-quality commodities tend to drive higher-quality commodities out of circulation. Horses, for example were used as commodity money in colonial New England. There was a tendency to use lower-quality horses to pay back debts.

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