It is almost impossible to define money in terms of its physical form or properties since these are so diverse. Therefore any definition must be based on its functions.
Functions of Money
Specific functions (mostly micro-economic)
- Unit of account (abstract)
- Common measure of value (abstract)
- Medium of exchange (concrete)
- Means of payment (concrete)
- Standard for deferred payments (abstract)
- Store of value (concrete)
General functions (mostly macro-economic and abstract)
- Liquid asset
- Framework of the market allocative system (prices)
- A causative factor in the economy
- Controller of the economy
Not everything used as money as all the functions listed above. Furthermore the functions of any particular form of money may change over time. As Glyn Davies points out:
"What is now the prime or main function in a particular community or country may not have been the first or original function in time, while what may well have been a secondary or derived function in one place may have been in some other region the original which gave rise to a related secondary function... The logical listing of functions in the table therefore implies no priority in either time or importance, for those which may be both first and foremost reflect only their particular time and place."
He goes on to conclude from this that the best definition is as follows:
Money is anything that is widely used for making payments and accounting for debts and credits.
Bills of Exchange
With the revival of banking in western Europe, stimulated by the Crusades, written instructions in the form of bills of exchange, came to be used as a means of transferring large sums of money and the Knights Templars and Hospitallers functioned as bankers. (It is possible that the Arabs may have used bills of exchange at a much earlier date, perhaps as early as the eighth century). The use of paper as currency came much later.
Paper Money
In China the issue of paper money became common from about AD 960 onwards but there had been occasional issues long before that. A motive for one such early issue, in the reign of Emperor Hien Tsung 806-821, was a shortage of copper for making coins. A drain of currency from China, partly to buy off potential invaders from the north, led to greater reliance on paper money with the result that by 1020 the quantity issued was excessive, causing inflation. In subsequent centuries there were several episodes of hyperinflation and after about 1455, after well over 500 years of using paper money, China abandoned it.
The Invention of Banking and Coinage
The invention of banking preceded that of coinage. Banking originated in Ancient Mesopotamia where the royal palaces and temples provided secure places for the safe-keeping of grain and other commodities. Receipts came to be used for transfers not only to the original depositors but also to third parties. Eventually private houses in Mesopotamia also got involved in these banking operations and laws regulating them were included in the code of Hammurabi.
In Egypt too the centralization of harvests in state warehouses also led to the development of a system of banking. Written orders for the withdrawal of separate lots of grain by owners whose crops had been deposited there for safety and convenience, or which had been compulsorily deposited to the credit of the king, soon became used as a more general method of payment of debts to other persons including tax gatherers, priests and traders. Even after the introduction of coinage these Egyptian grain banks served to reduce the need for precious metals which tended to be reserved for foreign purchases, particularly in connection with military activities.
Precious metals, in weighed quantities, were a common form of money in ancient times. The transition to quantities that could be counted rather than weighed came gradually. In A History of Money Glyn Davies points out that the words "spend", "expenditure", and "pound" (as in the main British monetary unit) all come from the Latin "expendere" meaning "to weigh". The author points out that the basic unit of weight in the Greek speaking world was the "drachma" or "handful" of grain, but the precise weight taken to represent this varied considerably, for example from less than 3 grams in Corinth to more than 6 grams in Aegina. Throughout much of the ancient world the basic unit of money was the stater, meaning literally "balancer" or "weigher". The talent is a monetary unit with which we are familiar with from the Parable of the Talents in the Bible. The talent was also a Greek unit of weight, about 60 pounds.
Many primitive forms of money were counted just like coins. Cowrie shells, obtained from some islands in the Indian Ocean, were a very widely used primitive form of money - in fact they were still in use in some parts of the world (such as Nigeria) within living memory. "So important a role did the cowrie play as money in ancient China that its pictograph was adopted in their written language for money." Thus it is not surprising that among the earliest countable metallic money or "coins" were "cowries" made of bronze or copper, in China.
In addition to these metal "cowries" the Chinese also produced "coins" in the form of other objects that had long been accepted in their society as money e.g. spades, hoes, and knives. Although there is some dispute over exactly when these developments first took place, the Chinese tool currencies were in general use at about the same time as the earliest European coins and there have been claims that their origins may have been much earlier, possibly as early as the end of the second millennium BC. The use of tool coins developed (presumably independently) in the West. The ancient Greeks used iron nails as coins, while Julius Caesar regarded the fact that the ancient Britons used sword blades as coins as a sign of their backwardness. (However the Britons did also mint true coins before they were conquered by the Romans).
These quasi-coins were all easy to counterfeit and, being made of base metals, of low intrinsic worth and thus not convenient for expensive purchases. True coinage developed in Asia Minor as a result of the practice of the Lydians, of stamping small round pieces of precious metals as a guarantee of their purity. Later, when their metallurgical skills improved and these pieces became more regular in form and weight the seals served as a symbol of both purity and weight. The first real coins were probably minted some time in the period 640 - 630 BC. Afterwards the use of coins spread quickly from Lydia to Ionia, mainland Greece, and Persia.