It is clear what money does, but its origins remain somewhat of a mystery, to many. Some argue that money has its roots in the power of the state. Others claim that the origin of money is a private business matter, and would exist even if governments did not.
In economic theory, money fulfills 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.
It is believed by some economists that the monetizing of an economy begins, when agricultural communities move away from subsistence farming, and start to specialize. This brings about positive gains, but means that trade with others, becomes necessary in order to profit from surpluses. As you would expect, this is best accomplished, using money.