The Roots of Money

Although used every day, the nature of money often remains unquestioned. But what is money? Looking at a common euro bill, one could see a simple paper of no real value. However, because of social construction and acceptance by communities diverse kind of more or less valued commodities have been used as money. Money fulfills many functions. It is a medium of exchange used in trade, it is also a storage of value for future consumption and a unit of account. “Saleableness”, being portable, durable and divisible, as well as having some kind of rarity are also usually preferred. The monetization of an economy is a highly social phenomenon that transforms and uses a specific kind a commodity into money in order to fulfill all those functions. Modern currencies as the euro are a specific type of currency called fiat currencies. These are not backed by any valuable commodity and are primarily supported by taxation.

There are two different theories that explain the roots of money. The first theory explained by Karl Menger in the article argues that the monetization of an economy is a common social phenomenon. As communities begin to specialize and leave a subsistence farming state, increase barter complexity can become very difficult. Finding the right person to exchange a cow against barrels of wine at a specific quantity can be time consuming. To reduce the costs and provide better bargain clarity, a specialized community would thus soon incorporate and agree on some form of currency. The second theory is elaborated by Mr Goodhart as the “Cartalist” theory. This theory argues that money did not appear because of a private phenomenon but rather as of a government decision for fiscal purposes. In order to finance its projects the state needs to collect taxes. This is not an easy task in a barter economy as income and expenditure cannot be measured. The introduction of a currency provides a unit of account that facilitates taxation. Demand and acceptance