MONEY is perhaps the most basic building-block in economics. It helps states collect taxes to fund public goods. It allows producers to specialise and reap gains from trade. It is clear what it does, but its origins are a mystery. Some argue that money has its roots in the power of the state. Others claim the origin of money is a purely private matter: it would exist even if governments did not. This debate is long-running but it informs some of the most pressing monetary questions of today.
Money fulfils three main functions. First, it must be a medium of exchange, easily traded for goods and services. Second, it must be a store of value, so that it can be saved and used for consumption in the future. Third, it must be a unit of account, a useful measuring-stick. Lots of things can do these jobs. Tea, salt and cattle have all been used as money. In Britain’s prisons, inmates currently favour shower-gel capsules or rosary beads.
The use of money stretches back millennia. Electrum, an alloy of gold and silver, was used to make coins in Lydia (now western Turkey) in around 650BC. The first paper money circulated in China in around 1000AD. The Aztecs used cocoa beans as cash until the 12th century. The puzzle is how people agreed what to use.
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