With colony cities on the moon and merchant ships mining asteroids, humanity has begun to colonize the solar system. Most of these entities are self-governing and trading is a very important business since most of them are only barely capable to provide for their own basic needs.
out of the many goods that can be produced in an emerging space economy, which one would make for a good currency? (I'm talking about commodity money, so I want the currency being a piece of something valuable)
Since the purpose of money is essentially to act as a common and fungible unit for accounting purposes (rather than trying to decide how many cows this pile of apples is worth, then trading the cows for lumber....), there are several ways to go, depending on the philosophical and political foundations of the society in space.
Fiat currency. Most of the money in todays world is fiat currency, and essentially has value because the issuing government says it has value, and because enough people believe the promise of value. This is behind the "Full faith and credit" backing of the USD, for example. If enough people no longer believe in the value of the currency for whatever reason, then the currency becomes valueless. Fiat currency has issues in a solar system setting, since money from a distant asteroid is pretty unknown outside the local area, and you have no "full faith and credit" in this place.
Commodity backed currency. Money was historically backed by silver for centuries (stop and parse the meaning of "Pound Sterling"), and more recently by gold (the US gold standard set gold at $35 USD/troy ounce). Commodity based currency is inflation proof, but can cause distortions based on the supply of the backing commodity (this is why silver backed money, being much more common and available than gold). Mining is problematic, since an unexpected strike can flood the market with a commodity, while prolonged economic growth without new supplies of the commodity can strain the system since there isn't enough money to support growth.
Digital/cryptocurrency. There could be some debate about this, since electronic transfers of fiat money through the SWIFT system or even your ATM/Interac card resemble this to a certain extent. The prime difference is cryptocurrency is not issued by governments and cannot be (easily) manipulated or debased by governments or the issuing party. This solves much of the "faith" issues inherent in fiat currency, but the user may not know "who" the issuer is, and governments can make things difficult by refusing to convert cryptocurrency into whatever the local unit of exchange is, making holding cryptocurrency inconvenient (you would either have to convert it on the black market, or go through chain of converting cryptocurrency to an "acceptable" currency, then into the local currency. This could be either mitigated or amplified depending on the attitude of local merchants. If they accept cryptocurrency, then all is good, but if they refuse it, then you are stuck with the "full faith and credit" argument again.
Locally issued national currency. This was used to my knowledge in the US during the era of "Free Banking" and by Canada up until the late 1940's, where a bank could issue the national currency backed by its own assets. Bank runs and other financial misadventures were localized because the currency was asset based (bank loans and mortgages are the assets of a bank, your deposit is a liability to the bank...). Since much of this depends on trust (is the bank cooking the books?), then it has local applications in an asteroid or space colony, but would tend to break down over even planetary scales ("issued by the bank of what?").
I suspect there will be a multitude of currency systems in place, ranging from local currencies in colonies or asteroids to fully fledged, energy backed currencies which are issues as cryptocurrency to ensure full faith and credit (you can always buy a Kw/h with one Solar Dollar, for example). Trade currencies like the Solar Dollar will be used in "international" trade due to convenience, while local currencies will be more convenient for small local purchases (a Solar Dollar might be worth far too much to purchase a cup of coffee with, for example).
"Space," it says, "is big. Really big. You just won't believe how vastly, hugely, mindbogglingly big it is. I mean, you may think it's a long way down the road to the chemist's, but that's just peanuts to space, listen..."
The Hitchhiker's Guide to the Galaxy, Douglas Adams
It takes days to get to the Moon, and months to get to Mars. Do you really want to have to send a ship all that way just to make a payment for spaceship insurance, or to pay taxes, or to pay someone to mine for you on another planet? Of course not. That's slow and inefficient, and carries dangers. What if the ship crashes, or explodes? For planet-to-planet transactions, this is a terrible mode of payment.
Use cryptocurrency instead, sent through signals in radio transmissions. Data in the transmissions can encode how much money is being sent from whom to whom. When you're on planets, you can just carry a card - like a credit card - and swipe that. The card contains money connected to your "Bitcoin" digital supply.
A government - governments, really - would need to endorse the currency, to ensure its stability. That's one issue that Bitcoin has faced for a long time. In fact, you'll definitely need international approval. I highly doubt that only one country is involved in this space exploration. Cooperation is the only viable option.
At the end of the day, they're all the same. Given the vastness of space, anything is effectively a fiat currency. The addiction people have to the shiny! that is gold, despite its effective low value, will be lost in the shear quantity available. Gold merely becomes a fiat currency that's heavy, awkward and expensive to transport.
Value can only be given to that whose value is accepted. All currencies will be fiat currencies, and that's just a matter of the accepted value of any given fiat currency.
For those who choose to say that ultimately no fiat currency has value, I say you are correct but in return I ask a different question: What, in space, has value?
The trouble with the follow up question is that it depends. If I'm at an asteroid mining colony then food with flavour has the most value. If I'm on a planet then maybe the resources from the asteroids have the most value.
I'd say Terry Pratchett was right when he said: Time. The time of your life.
Jalo fumbled in a belt pouch and brought out a was of 10,000 Day bills. Company scrip was harder than most world currencies. Any one of them represented almost twenty-eight years of extended life if cashed at a Company trading post. The Company's credit was the best. It paid in extended futures.
This sort of thing of course depends on available technology, it's something that cannot be estimated from our point in space and time as we don't know the technology that will be available to future space traders.
The US Dollar is an automated electronic international exchange system. It is accessible from pretty much anywhere, makes $14 trillion in financial transactions every day. It already accounts for varying regions of control (by national central banks), payments between banks, nations, etc. There is pretty much no need for any other system in the near-future.
The only issue with the current system is latency. In a solar-system civilization there will start to be significant latency issues in transactions between Titan and Venus, for example. This is mostly an engineering problem, rather than a design problem. Trying to day trade with 15 min lag in the Venusian Cloud City Stock Exchange will probably not be a great plan; but there is no reason that current financial transaction queues can't account for lag time in arriving transactions.
Conventional money usually needs some kind of central "government", a federal bank that maintains many of its properties (including the amount of money on the market) and provides its value - at least, fix me if I'm wrong, but as far as I know, current system of money is based on the fact that we trust in that it's accepted.
This way, if your people have the connection to the other world, it's a perfectly viable option to use either conventional (like USD) or cryptocurrency. (Bitcoin) The latter theoretically can work without it, as well - what I try to convey is that in this case, your people don't have to have their own federal bank, which makes things easier. However, they will rely on the "outer authority".
If these people are isolated or alone, then you have to build the base of the economy from scratch. Depending on what kind of economy you desire to build, it may vary, but in a money-based system, a backing product is necessary - like gold on Earth. It has to be infinitely divisible, very rare and generally accepted, just to name some of the most important requirements. Rare metals, metallic alloys, minerals from asteroids - you name it.
There's a midway situation, too, and in fact, I try to explore this one: there's a connection, but the other authorities are hostile. It means you can't really use their currency as a direct form of money, but through smuggling and other means of the black economy can bring in money, that, from that point, can partially be considered value that is part of the space community. This way, I presume, your space communities can profit from these illegal connections, with smaller exposure to the risk caused by the decisions of the federal bank regulating given currency.
I'm sorry for inappropriate grammar; I was in hurry a bit.
OP's question is actually similar to this one interplanetary trade in around 2400 CE by the nature of the problem.
As a piece of something valuable, even with space scarcity of resources(maybe), I'm glad to present you, the latest invention in energy money - energy diamond.
Scientists are turning nuclear waste into super-efficient diamond batteries
With a half-life of 5,730 years.
A diamond beta-battery containing 1 gram of C14 will deliver 15 Joules per day, and will continue to produce this level of output for 5,730 years — so its total energy storage rating is 2.7 TeraJ.
As energy it has cost about 75'000\$ per gram (0.1\$ per kWh), compare it to the current price of gold \$38,214.73 per kg.
Or it is 75'000'000 per tonne, even with SpaceX ITS prices of projected transporting cost with 140'000 per tonne it worth to transport in physical form if there is such a wish.
But sure energy does not have to be physically transferred in cases when it is not needed, or impossible to transfer. Same way as gold backed money do not transfer gold.
Purchasing power of energy will be different in different places. But to use the energy in a different place one have to deliver that energy to the place, or exchange already present energy in the place to already present energy in another place, if one like to use it there or order something there.
Price for energy from one place will depend on abundance of the energy in that place, abundance of matter in that place, cost of delivering goods and services from/to the place, technologies available, demand for services in the place, offers (what they can do with the energy, and how much other needs what they can do) in the place, energy sources available in different places etc etc.
Purchasing power of energy will define direction from which place to which place this energy is flowing.
If as an example a space station can produce lots of energy for cheap(effort, matter, work hours), but can't produce anything else(for some reason) there are 2 ways to solve the problem
It works same way as one may have a house in one country, but to actually use it -- one have to be in that house or rent it to others - for money or for services or use the house for other profitable operations.
Same way as currencies, you may have currency of a other country in the country, but one can't directly use that currency to buy something, because they do not accept it as payment, they accept their own currency as payment. They do so because of a reason, artificial and practical reasons. And for those reasons one have to use exchange service to get a currency of the country where he is at the moment, directly or indirectly (as by asking will you accept my money, and they maybe will but how much you money worth they will know from exchange rates of that currency)
Same for energy, one may have Terra Watts of power production on a space station, but if one can't use this energy for something useful it is worthless. If he have to obtain matter and deliver it from Jupiter, to be able to do something with that energy it may be not so much overall.
Also different services will cost different price - on earth recycling is expensive process, because they do not have lot of energy, so they make big trash fields - it is cheaper for them.
On a space station, recycling is cheap, because of cheap energy, but making some kind of trash storage is expensive, because delivery of new materials may be expensive, or just -- worth in energy in the place where it can be obtained and in energy needed to deliver it to the station.
Delivery and gathering the matter from Jupiter will cost about 300kWh/kg (depends on technology you have for gathering), delivery of that matter may cost from Jupiter to some station near earth will cost X amount of matter and energy (depends on technology used in delivery)
In general, it will stimulate matter to flow in a direction where it can be used, energy flow in direction where it can be used, and will stimulate to develop energy efficient technologies.
In an emerging space era, the currency model wouldn't be that far from today's era. Since even we can get a new source of gold in another place beside earth, a space mining process would be more complicated hence need more investment that would prevent a massive drop in gold values.
When you say about trading, which means fuels (in any forms) would be a precious value that can give more affect to the economy. Politic is also in play here as infant government in remote space area who just barely capable to provide basic needs may need and abide to a 'parent government' (maybe in earth or other large capital planets) that shares a common currency. (So we may see a Saturn Dollar $$)
Another possible things is a evolved model of currency that's not based on scarcity of precious tangible things, says like Bitcoins. This will be one of a possible solutions for currency to prevent our economy to fall to chaos when human can get their hands on a planet that entirely made of diamonds or gold.
