Money

Money is a medium of exchange. More generally, money is a good which is widely accepted in exchange for other goods. Money has arisen spontaneously in most societies, in their prehistory.

Historically, a wide variety of goods have been used as money, including cattle, shells, grain, precious metals, and decorated paper.

Medium of exchange

Money developed independently in many cultures as economic activity in those cultures became too complex for direct barter. People in those societies would make exchanges using a durable valuable good, accepting quantities beyond that needed for personal or household use, to make future exchanges for other goods with other people. As a society evolves increasing economic complexity and sophistication, the required properties of money would typically lead to the adoption of a semi-precious or precious metal as the medium of exchange.

The properties which make a good suitable as money are:

1. Durability. The good must not decay rapidly. The more durable money is, the longer period of time it can be stored for use in deferred consumption.
2. Fungibility. One unit or quantity of the good must be very similar to the next. Otherwise, certain units or quantities will be considered more valuable than others.
3. Divisibility. People purchase goods of various amounts of value. The minimum practical quantity of money should be low compared to the size of inexpensive purchases. Money should be easily divisible without loss of value.
4. Portability. Money should be easy to transport from one place to another, in quantities useful in exchange.
5. Scarcity. There should not be so much of the good readily available as to make the money value-less.

Many items used as money have been defective in one or more of the above criteria: Seed grain is durable, but requires some expense to maintain. Hides and animals are durable over periods of years, but animals require expensive maintenance. Sea shells come in different sizes and sometimes even particular shells of a certain size will have greater aesthetic value than others. Sea shells also lose value when split, resulting in a minimum quantum of money which may be impractically large. In some societies, the shells used for money were so common that large quantities of shells were required for large-value exchanges. Metals, particularly silver and gold, best meet these requirements, and most societies and nations eventually adopted either silver or gold as a medium of exchange.

Even gold is not always easily portable for very large transactions. Methods have been developed to minimize the difficulty of transferring large quantities of gold from one person to another. One method has been to store gold at banks, and to complete transactions by means of notes to the bank requesting transfers of gold from one customer to another. In some cases, the bank would merely make accounting entries, and not actually physically move the gold on deposit. Another was the invention of gold-backed currency. The government of a country would issue notes which were considered legal tender for debts owed to the government, and which were convertible at offices of the government for a specified amount of gold (or silver, for some countries). This solved the portability problem, but created new problems in its wake. To be successful as a currency, the people had to trust that the government maintained sufficient reserves of precious metal in its treasury to redeem the currency it had issued. Where people lost trust in the government's ability or willingness to redeem the currency in circulation, the currency would trade at a discount to actual quantities of precious metal. Governments also rarely resisted the temptation to increase the issue of currency faster than the increase in the reserves of precious metals, causing inflation.