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Long before money was invented, people were quite happy making, doing, and growing things for one another. In small communities, they could largely remember the payments and receipts of what was exchanged.But as communities grew, so the exchanges became more and more numerous. IOU notes might have been a neat solution. But unless you knew the individual issuer personally, they were hard to enforce or verify. So instead, people started to use objects, such as whale's teeth, as a kind of IOU

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Metal Money.
Once people start using money to facilitate trade, whether in the form of shells, barley, feathers, or whale's teeth, some useful characteristics of money become apparent.
Another noticeable feature of money was that having a lot of it made you powerful, and power could get you a lot of it. So kings hit on the idea of minting coins from precious metals, stamping them with an emblem that guaranteed their weight and value.

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Carrying around large quantities of coins could be exhausting work, and it was early Chinese rulers that hit on the idea of keeping their heavy coins back in the palace, while issuing IOU certificates on paper for long distance trading. Although the paper had no intrinsic value, people trusted that it is worth what it said it was worth, and they could always exchange it for gold or silver, or the coins it represented.

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Years ago on the Pacific island of Yap, the nearest thing to gold was the Rai stone, notable for its enormous size and weight. From the day the chiefs decided to ask for their taxes in Rai stones, it meant that for all taxpayers, the currency became universal, unavoidable, and under the control of the chief. just so heavy that the Yap population tended to leave their currency in one place and then trade effectively on promises. Any trader who owned a Rai stone on Yap could issue a promissory note against the value of their stone, and thus banking was born.

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In the 16th century, Spain brought home massive additional supplies of precious metals from the colonies. But what seemed like a dream come true and should surely have boosted trade turned sour when traders simply put up the price of their goods to match this new purchasing power. So the returning explorers were no better off, and those without the new gold were even worse off. It was only those who had debts which had in effect got smaller who were actually better off

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In the 18th century, the British forced their colonies in America to pay their taxes in pounds, and they made it illegal for the British colonies to print their own money. This meant that the colonies were forced to trade with the motherland to access the currency. According to Benjamin Franklin, the American War of Independence was caused by the sheer burden of British taxation and the disadvantageous trade needed to access British pounds.

And the hard won freedom after the war allowed the Americans to create the American dollar, which because of the country's vast trade and trustworthy tax base, eventually became the most widely used currency on the planet, leading many countries

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By the 19th century, banking had become a thoroughly respectable business.
By the 21st century, some banks had taken fractional reserve banking to a whole new level, funding most of their loans not from cash deposits from savers, but with loans from other banks, often secured against bundles of previous loans. So when there was a run on the bank in 2007, banks like Northern Rock not only didn't have enough money to pay out, but the effect went way beyond just one bank.

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Since the last crisis of a gold standard disappeared in 1973, the world has carried on trading in US dollars, even though these aren't backed by anything of intrinsic worth. The US government's decision to borrow billions for its bank rescue and stimulus plan dramatically increased supply of dollars, and some predicted that this would lead to a big fall in the dollar's value, on the basis that economies which print money so they can consume more than they produce will suffer price inflation and exchange rate depreciation.

Six years on, this still hasn't happened. Why then does the dollar retain its value? Perhaps with so much of the world holding its wealth in US dollar assets, people simply have faith that the dollar will retain its value. And the knowledge that so many others share that faith reinforces the general optimism that the dollar will stay strong.

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Minted coins and paper money, once the cutting edge of technology, are now used in only 2% of transactions. Credit card and electronic banking technology has enabled massive global transactions to take place in the fraction of a second, and digital technology is enabling new currencies to be created. Linden dollars, Bitcoin, and other cryptocurrencies which exhibit the enduring characteristics of money-- being hard to forge, durable, portable, divisible, and limited in supply-- and which may even challenge the power of government backed money. But until a government accepts taxes in Bitcoins or other privately issued currencies, or banks start lending in them, they are not much different from any other token, such as whale's teeth.

One sign that a new form of money has become important will be when governments and banks try to control it. And if governments and banks continue to have the power to control money, those who use it will always wonder to what purpose will they put that power.