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Money is a medium of exchange, that is to say an object which is widely accepted in exchange for goods. It provides a cost-saving alternative to the option of the direct exchange (or "barter") of goods for goods.

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.

Metals, particularly silver and gold, best meet these requirements, and most societies eventually adopted either silver or - latterly - gold as a medium of exchange. Various methods were adopted to avoid the cost of transferring large quantities of gold from one person to another. One method was to store gold at banks, and to complete transactions by means of notes to the bank requesting transfers of claims upon gold from one customer to another. Another was the invention of gold-backed currency.

Fiat money