Commodity money is form of currency where a commodity dictates its value. This is different to representative money we use in our day-to-day lives like coins and banknotes, as this is a proxy for value (ie. a 100 US dollar bill represents the value of 100 US dollars but the ink and paper used to create them are not worth 100 US dollars).
One example of commodity money is cigarettes:
People left their surplus clothing, toilet requisites and food there until they were sold at a fixed price in cigarettes. Only sales in cigarettes were accepted – there was no barter […] Of food, the shop carried small stocks for convenience; the capital was provided by a loan from the bulk store of Red Cross cigarettes and repaid by a small commission taken on the first transactions. Thus the cigarette attained its fullest currency status, and the market was almost completely unified.Radford, R.A. (1945). “The Economic Organisation of a PoW Camp“. Economica. 12 (48): 189–201.
A commonality between commodity money and representative money is that both currencies are subject to economic changes such as inflation and deflation.
The notion is widespread that for a long period of time and in a large economic area cigarettes served as currency in Germany after the recent war. Probably the most explicit statement of this belief, which the writer finds erroneous, is the following: “In Britain it [the cigarette] never, even at the height of the American occupation, went so far as to replace the existing metal or paper coinages. In occupied Europe it did.” While we examine here only the German case, it is probable that situations similar in many respects existed elsewhere.
In order to understand the role played by cigarettes as money, it is essential to examine the historical background of the problem. Up to the fall of 1946 American cigarettes were not considered either as a general measure of value or as an instrument of exchange.2 The Reich- mark (henceforth RM) was still reasonably stable, black market trading was limited, and the worst period of Germany’s economic decline had not yet begun. Although the price of cigarettes was very high, it was fixed by the general laws of supply and demand.³
Usually cigarettes were sold for Reichmarks, which at that time could be exchanged by American and British soldiers for pounds or dollars. Consequently, a soldier could sell part of his ration, have all the money he desired for his non-military expenses, and still save his whole paycheck. Large dollar and pound profits were made in many cases.