When you live in today’s world, you can reach only one conclusion as to where money comes from: governments. Sometimes it is one government, as with the U.S. Dollar or the Mexican Peso, or several governments, as with the Euro. Sometimes one country uses another country’s currency as its own, e.g. Panama and Ecuador, which both use the U.S. Dollar. But always, somewhere at the center of things, lies a government or, its alter ego, a Central Bank. (Boo!Hiss!)

If you go back through history, however, the picture is quite different. There is no question that the invention of money predates the creation of governments as we know them today. As far back as we know, money, in some form, was adopted spontaneously as the only solution to the immense difficulty of relying entirely on barter.

In order to fill this desperate need, each society adopted some form of money that worked for that society. For something to be money, the only constant was an understanding throughout society that it would be used and accepted as money. Additional requirements were few. First and foremost, it had to be something in limited supply. It wouldn’t do for it to be something that anyone could pick up off the street. In other words, it had to be either relatively rare or valuable in its own right. It needed to be reasonably portable so that it could be given to someone in exchange for what you were buying. Finally, it had to be something that was not too perishable. Grain would work, but bananas would not.

The historical record is replete with examples of a variety of things being used as money. What they all had in common is that they more or less satisfied the above criteria and worked for that particular society. Some forms of money, such as cattle, had problems that we don’t have to deal with today. Whatever else you may say about the dollar, it doesn’t have to be fed and won’t die on you (except perhaps metaphorically). The point is that if people consider something money and use it as money then it is money. This remains true today where, for example, in prisons cigarettes are used as money.

An example from ancient China is particularly instructive on how money can go from the concrete to the abstract. At one point people began using farm implements as money. That proved unwieldy, of course, and over time the actual farm implements were replaced by small metal tokens that were stylized representations of farm implements.

No one knows exactly when gold began being used as money, but it was clearly before the dawn of recorded history. Gold’s qualifications for that role are impeccable. It is rare. It is virtually indestructible. It neither rusts nor tarnishes nor evaporates. It is easily divided into units of any size or melted down and combined into larger units.

With the advent of governments, it was apparent that controlling money is a huge benefit for anyone exercising sovereign power. So emperors and kings began minting coins out of gold and silver with their picture on them in order to proclaim their power and glorify themselves. And almost as soon as coinage began, so did monetary debasement.

Monetary debasement stems from a human desire that ranks up there with food and sex — getting something for nothing. If you can turn one hundred coins into two hundred coins by replacing the precious metal component with something cheaper, then you have created money out of thin air and can buy twice as much as before.

That is until people catch on and then you have inflation. That is a topic that will be revisited time and time again in future posts.

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