Commodity money is a form of money that has inherent, intrinsic value because it is made from a commodity that has value by itself for production or consumption. Commodity money is a physical asset - you can see it, hold it, touch it.
In simpler terms, gold coins were commodity money because the gold from which the coins were made had intrinsic value and if the coins were melted down, the gold would still retain its value. The gold could also be used for production, i.e., making jewelry, giving it its intrinsic value.
But we should backtrack a bit here – what is money? Money can be defined as an asset that is accepted as a medium of exchange for goods or services. The value of that asset can and was determined by many different factors but it often boiled down to a commonly recognized value by the people that use it.
In that context, there are three primary categories or types of money (the latter 2 will be discussed in more detail later):
Popular examples of commodity money throughout history were gold, silver, and copper, cocoa beans, shells, tea, barley, furs, and even cigarettes. Clearly, people exchanged all types of commodities for goods or services. Then, how is commodity money different from bartering?
Commodity Money vs. Bartering
Bartering is an exchange system where goods are exchanged for other goods or services. The value of the items that are being exchanged is determined by the people participating in the trade. So, if an ancient cattle farmer was to give a calf to a carpenter in exchange for a table, that would be bartering.
But the system of bartering has several limitations. For one, it is difficult to transport different types of goods across large distances, making it impractical. Second, there is no set ‘exchange rate’ or how the value of one asset converts to all other assets.
Third, many goods cannot be divided into smaller parts, making smaller trades or more accurate exchanges difficult. Finally, many goods are also perishable, which disallows them to be a store of value. So, bartering faced 4 challenges:
To make trade more effective, the concept of commodity money evolved. A single type of asset that was portable, divisible, and non-perishable would be chosen and used to trade for other goods and services at an agreed-upon exchange rate.
Thus, the key difference between barter and commodity money is that commodity money uses a single recognized unit of exchange to purchase goods or services.
Two Other Primary Types of Money – Representative and Fiat Money
To reiterate, commodity money is money that has intrinsic value due to the commodity of which it is made. But there are also two other primary categories of money:
To simplify, commodity money is made from a physical commodity and has intrinsic value, representative money has no intrinsic value but represents a commodity that has intrinsic value and can be redeemed for it, while fiat currency has no intrinsic value and does not represent a commodity but is given value as a unit of exchange by the institution that issues it.
Examples of Use of Commodity Money
The most common example of commodity money throughout history is the use of metal coins, like gold, silver, or copper. Silver coins based on the Spanish dollar are likely the best example of commodity money in the Americas.
But that is far from the only example of the use of commodity money. For instance, beaver pelts were the main unit of exchange in the area around Hudson’s Bay in Canada for fur traders in the 18th century.
This system came about because the First Nations were not interested in exchanging goods for precious-metal coins, so they needed to find another medium of exchange – the beaver pelts. They even had an exchange rate set up, e.g., 5 pounds of sugar were worth 1 beaver pelt while 1 gun cost 12 beaver pelts.
Eventually, even that commodity money system evolved. For convenience, Hudson Bay post managers started issuing stamped copper or brass tokens in different sizes – these were called made beaver coins. The largest token represented the pelt of one adult male beaver in good condition. The smaller tokens represented smaller pelts. Thus, the commodity money system of the fur traders evolved into a combined commodity and representative money system over time.
In modern times, it may seem like commodity money is a historical occurrence, given that almost all countries use representative or, more commonly, fiat money. But that is not the case – commodity money can exist alongside other money categories.
Cigarettes are a common form of commodity money when other types of currency are prohibited. For example, they were often used in prisons in the US as a unit of exchange before smoking was banned in prison in the early 2000s.
While the line where a commodity becomes a currency can be debated, generally speaking, whenever a single commodity is recognized by a population as a unit of exchange for goods or services, it can be considered commodity money. Source
The relationship between bonds yields and the gold market is complex and shifts in response to economic, geopolitical, and market conditions. Over the years, this correlation has seen phases of both positive and negative alignment and, at times, almost negligible.
When considering purchasing gold or bonds, there are factors to consider when choosing between the two. To break it down to a brief synopsis, many move money into gold as a relatively safe way to store value when bond yields are low. If bond yields are doing well, some may realize an increase. In this case, some choose bonds over gold.
Bond yield refers to the return an investor realizes on a bond expressed as an annual percentage. Bond yields in the interest rate offered by bonds. The lower bond prices usually produce a higher yield.
When bond prices rise, yields fall, and vice versa. This inverse relationship exists because when a bond’s price rises above its face value, its fixed interest payments represent a smaller percentage return on the investment, hence a lower yield.
Understanding bond yields is crucial for investors, given the pivotal role bonds play in the worldwide financial landscape. Additionally, the dynamics of bond yields often offer a window into overarching economic and market patterns.
Types of Bond Yields
Nominal Yield (Coupon Yield)
This is the annual interest payment divided by the bond’s current price. It is called the coupon yield because bonds used to have physical coupons that investors would redeem for interest payments.
Current Yield
The bond’s annual interest payment divided by its current market price.
Yield to Maturity (YTM)
YTM represents the total return you will receive by holding the bond until it matures, YTM considers the bond’s current market price, par value, coupon interest rate, and the remaining years to maturity.
Yield to Call (YTC)
For bonds that can be “called” or paid off before their maturity date, the YTC measures the yield, assuming the bond is called at the earliest possible date.
What is the Difference Between a Treasury Yield and a Bond Yield
“Treasury yield” and “bond yield” are often used interchangeably in general discourse, but they have distinct meanings within finance. When comparing gold to bonds, this distinction should be noted.
Treasury yields specifically pertain to U.S. government-issued securities, while bond yields can encompass a spectrum of debt bond types.
U.S. Treasuries are considered a safe haven investment like gold since they are backed by the “full faith and credit” of the U.S. government. As a result, their yields often serve as a benchmark for risk-free rates in financial markets.
What Affects Bond Yields?
There is a lot of speculation around this topic, and investment analysts may disagree on the influences affecting bond yields at any given time. This list of situations may affect bond yields alone or alongside other forces.
Interest Rates
Generally, bond prices fall when central bank interest rates increase and yields rise.
Inflation
Bonds tend to perform poorly in inflationary environments since fixed payments have less purchasing power. Thus, rising inflation can lead to rising bond yields.
Credit Risk
The riskier the bond, the higher the yield demanded by investors to compensate for the possibility of default.
Economic Conditions
In uncertain economic times, investors might flock to the relative safety of government bonds, driving up prices and pushing down yields.
Is There an Inverse Correlation Between Bonds and Gold
The correlation between bonds and gold is complex and can vary based on economic, geopolitical, and market environments. Historically, there have been periods where the correlation was negative, positive, or even close to zero. The correlation is not static and can change over time based on influencing factors.
Contributors to Negative Correlation
Inflation Hedge
Gold is often seen as a hedge against inflation. In an environment where inflation is rising or expected to rise and the dollar is weaking, the real value (after adjusting for inflation) of fixed bond payments could decrease, making bonds less attractive.
Safe Haven
During times of economic uncertainty or geopolitical tensions, investors may seek safe-haven assets. Both gold and certain bonds (like U.S. Treasuries) are seen as safe-haven assets. In certain scenarios, if investors prefer gold over bonds, gold prices may rise while bond prices fall, and vice versa.
Interest Rates
Rising interest rates can decrease bond prices. At the same time, higher interest rates increase the opportunity cost of holding gold (which does not yield any income).
The opportunity cost of holding gold: The potential returns or benefits an investor forgoes by owning gold instead of other potentially profitable investments.
Established in 2003, the Artistic Infusion Program (AIP) contracts talented, professional American artists who represent diverse backgrounds and a variety of interests. These artists work with Mint staff to create and submit new designs for our coins and medals.
AIP artists’ designs are found on many coins and medals. Artist information is included in historical documents, Certificates of Authenticity, and promotional materials. In most cases, the artist’s initials appear on the final coins or medals, along with the initials of the Mint medallic artist who sculpted the selected design.
Are you captivated by the allure of currency history and the stories embedded within each coin? Got a collection of coins from every nook and cranny of the globe? The official currency of Panama has a long and rich history spanning over five centuries, dating back to the time the first Spanish explorer, Vasco Núñez de Balboa, set foot on the isthmus of Panama.
First things first – Why is Panama money called balboa? Well, the national currency of Panama, the Panamanian balboa, is named after Vasco Núñez de Balboa – the Spanish explorer who discovered the Pacific Ocean in 1513 after crossing the isthmus of Panama.
He was the first European to see the vast body of water that separates North and South America from Asia, claimed it for the Spanish crown, and established the first permanent European settlement in Panama, Santa María la Antigua del Darién. Balboa’s discovery opened the way for international trade and colonization in the region, and he became the governor of the province of Panama.
1904 – The Cornerstone
His legacy is honored by the Panamanian people, who adopted his name for their currency in 1904 when Panama gained its independence from Colombia. The balboa replaced the Colombian peso, which had been the official currency of Panama since 1821 when Panama joined the Gran Colombia, a federation of former Spanish colonies. The balboa was equivalent to the US dollar right from the start and backed by silver coins minted in Panama.
As liberty prevailed, the wave of change brought forth the debut of fresh silver coins in values of 2 1/2, five, 10, 25, and 50 céntimos. Subsequently, the currency expanded to encompass denominations of one-tenth, one-fourth, one-half, 1 1/4, and one céntimo. These Panamanian coins not only mirrored the size but also replicated the metallic composition akin to those found in the coinage issued by the United States, adding a fascinating layer to the evolving currency landscape.
The Dual Currency System
The Panamanian balboa is part of a unique currency arrangement that allows Panama to use both the Balboa and the US dollar. This system, known as the dual currency system, was established in 1904 when Panama signed a treaty with the United States and adopted the US dollar as its legal tender, granting the latter the right to build and operate the Panama Canal – a strategic waterway that connects the Atlantic and Pacific oceans.
In exchange, the US agreed to provide Panama with economic and military assistance and to guarantee its sovereignty and independence. The dual currency system has several advantages for Panama, such as:
However, it also has some drawbacks, such as:
Despite these challenges, the dual currency system has proven to be successful and beneficial for Panama, as it has contributed to its economic development and annual growth.
The Rise and Fall of the Balboa Banknotes
The Balboa coins enjoyed a period of stability and popularity until the 1930s when the global economic crisis and the devaluation of the US dollar affected the exchange rate and the value of the Balboa. The Panamanian government, with President Dr. Arnulfo Arias, decided to introduce paper money, or banknotes, in 1941, which were also equivalent to the US dollar and issued by the Banco Central de Emisión de la República de Panamá.
The banknotes were printed in denominations of 1, 5, 10, 20, and 50 Balboas and featured the portraits of prominent Panamanian figures. However, the banknote issue was short-lived. A mere week later, a military coup ousted Arias from power, replacing him with Ricardo Adolfo de la Guardia Arango. The Banco Central de Emisión was dissolved in 1949, and all Balboa banknotes were withdrawn from circulation.
The remnants of these banknotes are now rare treasures, known colloquially as the "Seven Days’ Notes" or the "Arias issues," and hold significant value among collectors to this very day.
The Pulse of the Panamanian Economy
The Panamanian government faced several political and economic challenges in the following decades, such as corrupt governments, fraudulent elections, military coups, and US interventions. The Balboa coins remained in use, but they were overshadowed by the US dollar, which became the dominant currency for daily transactions and international transactions.
Throughout this period, Panama continued to use U.S. banknotes alongside the Balboa, emphasizing its strong economic ties with the U.S. Wondering what currency is mostly used in Panama? The Balboa coins are mostly used for small change and everyday transactions, while the US dollar is used for larger purchases and savings. Panama's economy relies predominantly on the services sector, constituting nearly 80% of its GDP.
What about the modern times? In the third quarter of 2023, Panama's economy showed significant growth, expanding by 9% compared to the previous year. Looking at the broader trend, the country's Gross Domestic Product (GDP) Annual Growth Rate has seen an average increase of 5.91% from 2010 to 2023.
Notably, the second quarter of 2021 witnessed a remarkable high with a growth rate of 43.90%, while the second quarter of 2020 experienced a record low with a decline of -36.20%. These figures reflect the dynamic nature of Panama's economic performance in recent years.
The Features of the Panamanian Balboa
The Panamanian balboa currency code is PAB (numeric: 590) and is composed of coins in denominations of 1, 5, 10, 25, and 50 cents or 100 centésimos, and 1 and 2 Balboas. The coins are issued by the National Bank of Panama, one of the two public banks in the country since Panama has never had an official central bank. The coins are mostly used for everyday transactions, such as buying groceries, paying bus fares, or tipping service workers.
What does Panamanian balboa look like? The Balboa coins have various designs and motifs that reflect the historical significance and national symbols of Panama, such as the bust of Vasco Núñez de Balboa, the namesake of the currency, on the obverse of the 1 Balboa coin, and the coat of arms of Panama on the reverse.
The Panamanian balboa does not have any banknote issue, as the US dollar is used for large transactions and international transactions. The US dollar bills circulate freely in Panama and are accepted by all businesses and institutions. The US dollar bills are also known as private currency, as the Panamanian government does not issue them, but by the Federal Reserve System of the US. Source
