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.

Origins and development

It may be assumed that money was first adopted in place of barter because it avoids the inconvenience of what has been termed "the search for a double coincidence of wants" (in order to barter some corn for a pig, for example, it would have been necessary to find someone who had a pig that he did not want, and who also happened to want some corn). For many centuries the medium of exchange used to avoid the cost of searching for such coincidences was one of a variety of commodities that had generally accepted value based upon their scarcity or cost of production - latterly silver or gold. In the course of time however, commodity money was gradually supplanted by bills of exchange issued by banks, then by banknotes that were exchangeable for commodity money - and finally, in the 20th century, by fiat money, whose value depends solely upon a government order or "fiat".

Commodity money

The properties which make a commodity 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.

Fiat money

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.