Money was not invented by governments. It emerged because trading directly, a goat for a pile of grain, only works when both sides want exactly what the other has. People needed something everyone would accept.
From shells to gold
Over thousands of years, societies tried shells, salt, cattle, glass beads and giant stone discs. Many failed because someone found a way to produce more of them cheaply. When European traders arrived in West Africa with factory made glass beads, the beads used as money there lost their value.
Gold won almost everywhere, because it is rare, does not rot, can be split and melted back together, and nobody can make more of it on demand.
The six properties of good money
- Scarce: hard to produce more of
- Durable: does not decay over time
- Portable: easy to carry and send
- Divisible: can be split into small amounts
- Verifiable: easy to check it is real
- Fungible: one unit is as good as another
From gold to paper, and paper alone
Gold is heavy, so banks issued paper notes that could be exchanged for it. Over the twentieth century that link was cut step by step. In 1971, the United States stopped converting dollars into gold for other countries. Since then, the major currencies are backed by nothing but the trust placed in the states that issue them.
Bitcoin is the first attempt to build money that is scarce like gold, but as easy to send as an email.