Question

2. Where does money derive its value from according to the commodity money view? Use the example of the fisherman and the farmer in the paper by the Bank of England to give a critique of this view and explain why money cannot be a commodity.

Answer 1

2.Commodity money as a physical good that consumers universally use to trade for other goods. In other words, it is like the money we use today, but has an actual value. For example, gold was used as money, but also in the manufacturing of jewellery. So it had value outside its use as a medium of exchange. In economics, this is known as ‘intrinsic value’.

Commodity money is unique in the sense that it is the only form of money that has an underlying value. Even though we no longer use commodities such as gold as a form of money; it still has value as jewelry or gilding.

Money cannot be a commodity because commodities are perishable, indivisible and have intrinsic value. You also need to have double coincidence of wants. The fisherman can sell fish to a farmer only when the farmer is able to supply a crop that the fisherman demands.As long as you find an apt buyer for your product who is able to sell you what you want, you have to suffer search cost.

One more problem is the indivisibility. You can exchange 1 fish for 1 apple. But its difficult to exchange 1/2 fish for 1/2 apple. Similarly, the commodities are not uniform. Fruits have different tastes, shape and size. All these things prove that commodities cannot be used as money.