There is much debate between the full history of money and its origins. For the relevance of this essay, we will ignore the debate and discuss the history of money and barter only as it pertains to the economic value and use of money. Before a monetary system, humans are believed to have existed in a barter economy and slowly progressed towards a monetary system. which has existed in many different forms ranging from amber, eggs, feathers, gongs, hoes, ivory, jade, kettles, leather, mats, nails, oxen, pigs, quartz, rice, salt, thimbles, umiac, vodka and others . (History of Money, Glynn Davis P27). Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an Original Essay Since money has existed in numerous different formats, it becomes apparent that it is nearly impossible to define it by its physical characteristics. Instead, we defined money by its function. In economic theory, as highlighted in the BoE Summit Paper (Ali et al), something is considered money based on its functionality as a medium of exchange, a unit of account and ultimately a store of value. *Although Glyn highlights many more functions of the coin, it is important to note that many other functions are abstract and not necessarily required. Let's examine the economics of barter, its problems, and how these 3 functions of money alleviate the inefficiencies and problems of barter, thus giving value to money. The barter economy is described as an economy in which a good that one wishes to consume is obtained by exchanging it directly for the good that one owns and as such there is no good used as a medium of exchange (ModellingMonetary Economics, pages 34-35) . At the beginning of civilization, when the economy was small and there were fewer goods, the barter economy was not a big problem, but as the economy grows and there are more people and more goods to exchange, l The barter economy can be very inefficient because it requires a double coincidence of desires for an exchange to occur. A double coincidence of desires occurs when in order for person A and person B to trade they both have to possess what the other wants, in a large economy with many goods this can prove to be an expensive undertaking. Additional costs in a barter economy involve the perishability of a good: for example, suppose Person A has some corn that he wishes to exchange for cotton. Since an exchange can only occur in the case of a double coincidence of needs, there could be a case where person B buys cotton at time = t, so that he can exchange it for corn. It is not unfair to say that this would take some time, for example assuming that person B acquires cotton at t+1 which he hopes to exchange for corn. However, at t+1 the grain has perished. Person A lost a trade, and Person B, who went to buy cloth only to exchange it for corn, lost, as he is stuck with a good he doesn't want and must once again embark on the quest for a double coincidence of desires. Paul Samuelson further delves into the problem of the barter economy and its inefficiencies using the OLG model. Noting that without money there would be no incentive to trade between generations and therefore the economy would be in autarky. Money solves these problems by acting as a decentralized record-keeping system. The OLG model shows how the use of money in an economy not only facilitates trade between generations, but also increases the well-being of the economy, such that both parties are now better off. The average exchange function of money is very useful for eliminating the costs associated with finding a double coincidence of desires. The function of currency as a unit of account allows value to be attributedreal not only to goods but also to other services. And it allows you to price goods more accurately. The importance of this function can be highlighted in an example: if we assume that cows are used as a medium of exchange and someone wants to buy a pair of shoes. A pair of shoes is not worth a whole cow, but both parties agree that it is worth half a cow. In this scenario, no exchange can take place, you simply cannot give half a cow without killing it and thus destroying its value. Simply put, since the cow is not divisible, it cannot serve as a true unit of account and therefore makes trading difficult. And finally, the monetary function as a store of value is also important, if money did not have a stable store of value, no one would be willing to accept it as a medium of exchange, for fear that it would lose its value and they would be unable to use it. The corn example above highlights why this function of money is important. However, as Noah Smith notes, it is important to understand that when economists refer to money as reserve value, this is within short-run parameters. In fact, if it were a long-term store of value, it would discourage its use as a means of exchange. Money is not without its flaws, as Bruce Chap points out. The use of money induces two transactions, from goods to money and from money back to goods, whereas a barter economy requires only one, a direct exchange of goods. This can result in what is sometimes called a switching cost. To evaluate the magnitude of an exchange cost we use Bruce Chap's model: where ?= cost of exchanging goods per person, ?m = exchange cost associated with the use of money & J = number of goods in the economy. If in this model we assume that exchange costs are equal to zero, in the case in which the number of goods is greater than 3 (J>3). Monetary exchange is cheaper than barter and therefore a superior payment mechanism. However, in reality, it is worth considering that there would be exchange costs, especially if commodity money (i.e. gold coins) were to be used. An exchange cost in such an example might include the cost of verifying the weight and quality of the gold. Therefore, in this scenario, the benefit of money (reduces search costs) could be offset by potential switching costs. Because of these and other problems with commodity money overtime, money has been modified and developed to better fit people's needs. From commodity to guaranteed commodity (gold standard) and subsequently to the monetary system used by all countries today, fiat money. Bitcoin valued as money and also what category of money it is in (includes why it would be good money). Understand that in economic theory money acts as an instrument that functions as a medium of exchange, unit of account and store of value. Let's start by discussing how bitcoin fulfills these functions. To be used as a medium of exchange, a sufficiently large number of people must be willing to accept bitcoin in exchange for goods and services. This is because a person will only accept bitcoin if he believes that others would also be willing to accept it from him. This poses the first obstacle for bitcoin because it has no intrinsic value and therefore to be used as a medium of exchange it must provide a useful and valuable function to people, which fiat does not have. While it is arguable that fiat currency is inherently worthless, it is important to note that a government/state's support for fiat currency induces trust. This support provided by the state strengthens fiat trust among everyone. Bitcoin's initial use was largely limited to illicit activities on the dark web, the most famous Silk Road 19.000.