One cannot study the history of colonial America, especially Virginia, without realizing the significance of tobacco. In 1612, John Rolfe was the first in Jamestown to grow marketable tobacco after obtaining superior seed from the West Indies, where the Spanish had outlawed the sale of tobacco seed to foreigners on penalty of death. Tobacco helped early colonial Virginia move from subsistence to exchange. Rothbard notes that “a man’s labor in tobacco could earn six times as much as grain.” Therefore, most switched to producing tobacco. Tobacco production exploded:

1616—2.5 thousand pounds 1618—50,000 pounds 1620—119,000 pounds 1624—203,000 pounds 1672—17.5 million pounds 1688—28 million pounds

Tobacco also became a generally-accepted medium of exchange or money. In fact, for a time, there was—rather than a gold standard—a “tobacco standard.” This took place perfectly in line with Menger’s theory (which I’ve discussed). Money—specifically tobacco—emerged as a medium of exchange due to its utility, not because of either state decree or tax demand. Government interventions followed, but these did not make the money money. …

The simple historical reality, however, not only destroys the above chartalist arguments, but illustrates the Mengerian monetary theory—that monies emerged from individuals’ indirect exchanges of commodity goods as media of exchange. This can be seen particularly with tobacco. Before reviewing the history of the tobacco standard in colonial Virginia, we should note some interesting history about the word currency.

In 1740, Hugh Vance published An Inquiry into the Nature and Uses of Money, which was reprinted in the third volume of Colonial Currency Reprints (1911). Vance wrote (also quoted in Michener),

The Word, Currency, is in common Use in the Plantations . . . and signifies Silver passing current either by Weight or Tale. The same Name is also applicable as well to Tobacco in Virginia, Sugars in the West Indies &c. Every thing at the Market-Rate may be called a Currency; more especially that most general Commodity, for which Contracts are usually made. And according to that Rule, Paper-Currency must signify certain Pieces of Paper, passing current in the Market as Money. (emphasis in original)

The word “currency” had to do with what was current as a medium of exchange. This is evidence that goods not only traded in barter but could be exchanged indirectly for other goods, which is where the term “currency” comes from. Michener provides further commentary, …

While tobacco ceased to be money after the advent of the Constitution, its usage as money has reappeared throughout history. For example, in 1945, an article was published by an economist and prisoner in a POW camp named R.A. Radford. He recorded how cigarettes became a medium of exchange due to the demand for them as consumer goods, then for their ability to use in trade. This was not just because cigarettes were a convenient unit of account, but because of their tobacco content and the demand for them. Radford reports,

Between individuals there was active trading in all consumer goods and in some services. Most trading was for food against cigarettes or other foodstuffs, but cigarettes rose from the status of a normal commodity to that of currency….

Although cigarettes as currency exhibited certain peculiarities, they performed all the functions of a metallic currency as a unit of account, as a measure of value and as a store of value, and shared most of its characteristics. They were homogeneous, reasonably durable, and of convenient size for the smallest or, in packets, for the largest transactions. Incidentally, they could be clipped or sweated by rolling them between the fingers so that tobacco fell out. (emphasis added)