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Word Count: 1,199
The use of money began in the sixth century BC in what is now western Turkey when lumps of gold found in rivers were melted and turned into pieces of uniform size imprinted with a stamp For almost all of the time since then the common monetary system has been commodity money whereby a valuable commodity typically a metal is used as a widely accepted medium of exchange Furthermore the quantity of money was not under anyones control private agents following price incentives took actions that determined the money supply Today the prevalent monetary system is that of fiat money in which the medium of exchange consists of unbacked government liabilities which are claims to nothing at all Moreover governments have usually established a monopoly on the provision of fiat money and control or potentially control its quantity Fiat money is a very recent development in monetary history it has only been in use for a few decades at most Why did this evolution from commodity money to fiat money take place Is fiat money better suited to the modern economy or was it desirable but impractical in earlier times Were there forces that naturally and inevitably led to the present system Fiat money did not appear spontaneously since government plays a central role in the management of fiat currency How did govern-ments learn about the possibility and desirability of a fiat currency Did monetary theorizing play any role in this evolution In this article I will argue that the evolution from commodity to fiat money was the result of a long process of evolution and learning Commodity money systems have certain advantages in particular in providing a natural anchor for the price level But they also have certain disadvantages manifested in particular in the difficulty of providing multiple denominations concurrently These problems arose early on in the fourteenth century in the form of money shortages Societies tried to overcome these
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