The literature on the origin of money traces the evolution of money in different parts of the world. It explains the transition from direct exchange (barter exchange) to indirect exchange and within the indirect exchange analyses how various commodities and non-commodities acquired the characteristics of money. The nature of money literature also looks at the qualities and the characteristics or functions of money and again the literature also discusses the issue of why money as an institution arises through the spontaneous-order process.

This essay reviews and explains these broad issues in the literature. Section II of the essay explains the origin and evolution of money in different parts of the world, while Section III discusses the nature of money in terms of qualities and functions of money. Section IV then explains why money is an institution that arises from the spontaneous-order process and Section V finally provides the summary and conclusions.

II.The Origin and Evolution of Money

The literature on money links the origin of money to the emergence of trade or exchange among individuals. In the early stages of trade, exchange involves direct exchange of goods or services for other goods or services. This direct exchange of goods or services is known as the barter system and it was more of individuals exchanging their surplus goods for a comparatively necessary goods or what Carl Menger calls economising individuals exchanging goods “that have a smaller use value to them than goods in the possession of other economising individuals who value the same goods in reverse fashion”1.With economic progress and specialisation in production resulting in an increase in trade it became increasingly clear that voluntary direct exchange would be impossible to make everyone better-off because of the inconveniences of the barter system. Major inconveniences under the barter system include double coincidence of wants, difficulties of sub-division, measure of value, store of value, portability and the inconvenience of borrowing and lending. Menger explains the concept of double coincidence of wants as a rare situation “that one person with a smaller use value of a good may meet another person who value the same good in the reverse fashion and be prepared to change”2. The barter economy also lacked common measure of value since there was no common base to measure the value of things. Moreover, the difficulty of carrying bulky goods from place to place did not enhance exchange under the barter system. Again, the lack of a common store of value under the barter system means individuals do not have proper means to store their wealth. These inconveniences of the barter system led to the development of a process of indirect exchange.

Indirect exchange involves the use of one of the goods in the community as a medium of indirect exchange, that is, to serve a monetary function. Menger explains the choice of the particular good in any community to become a medium of indirect exchange, through the concept of the good’s saleability at any given time and place relative to other goods under the influence of custom. Thus writes Menger, “With economic progress, therefore, we can everywhere observe the phenomenon of a certain number of goods, especially those that are most easily saleable at a given time and place, becoming under the powerful influence of cu