Mainstream economists normally say that money developed within society as a solution to the inconvenience of barter, but this view is increasingly challenged, especially by modern monetary theorists.
Drawing on the work of economic anthropologists like David Graeber (who wrote Debt: the first 5000 years, Melville House, 2011), these economists say there never was a widespread barter economy and money was a state (government) creation.
Authorities created money, initially using tally sticks and other means, so they could provision themselves. They created taxes at the same time so that people had an essential need for the government's money.
Citizens had to work to get the government's money, hence unemployment was born: people seeking paid work.
In this account, the government must create and spend money before taxes can be paid.
Eventually precious metals were used in coinage, to varying degrees, and people came to believe that the value of the metal was linked to the value of the coin.
Paper notes were eventually created by governments, and again the government had to spend them into existence.
These days, most money is electronic - numbers in a spreadsheet at banks.
There was a "gold standard" last century when a government was supposed to have enough gold on hand to equal the money supply, and a nation's currency value was linked to the value of gold (a kind of fixed exchange rate).
US president Richard Nixon finally dismantled the gold standard in 1971 as it became unworkable.
Government currency is now said to be "fiat" currency because it is not backed by anything real except government fiat (authority).
So where do Australian dollars come from? It is not simple.
That's because there are different kinds of Australian dollars, with "reserves" (high-powered money created by government) at the top of the money pyramid (hierarchy).
Then there is money created by commercial banks when you take out a loan with them. This is called "credit money" and is less secure than reserves.
There are other kinds as well, including cash (bank notes and coins).
Central banks like the Reserve Bank of Australia create Australian dollars at will from nothing, like when they buy government bonds on the secondary market (they are not allowed at the moment to buy bonds from Treasury on the primary market).
Otherwise, the government (which includes its central bank) creates new Australian dollars whenever it spends, and destroys money via taxation. The net result is the money supply.
But the money supply has to be distinguished from the "velocity" of money (spending) as money goes round and round via spending.
So the money supply is not necessarily the culprit when it comes to things like inflation.
See our book Sustainability and the New Economics (Springer, 2022) for more.
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