Reply To: Gold as a Commodity


How widely traded a good is depends on the number of people who trade it. It’s possible that a large number of people trade in something because each of them puts the good to a different use, but it’s also possible that a large number of people trade a good who put it to the same use.

Of the small number of commodities that are most widely traded, precious metals are preferred because they possess properties that make them more suitable media of exchange: portability, durability, divisibility, and so on. Living things, like cattle, are inferior media of exchange on these grounds.

There’s no circularity, but there is an historical dynamic of money’s development. People trading in a barter world would select a widely traded good to make indirect exchanges. If they select cocoa beans, then they can come to replace cocoa beans as a medium of exchange with gold nuggets (once they perceive the superiority of gold over cocoa beans) by introducing gold as a redemption claim (i.e., a money substitute) for cocoa beans at the market rate of exchange. Then cocoa beans and gold nuggets as media of exchange would compete for users. At the next step, entrepreneurs could introduce gold coins as a form of certification, produce them and see if people preferred them over gold nuggets sufficiently to make their production profitable.