currencyI know that money aids trading. I think it’s an evolution of the barter. But, why it’s generally accepted?
How the governement (or any other institution, if there is any institituon) does make it work? I heard that in the past money was founded by gold and other precious metals, it’s still the case?
It seems to be a subjective question, but I think it’s not. I expect historical arguments in your answer, but I don’t know if history has anything to do with it.
Money appears in an economy because it solves several problems with barter systems:
Historically gold and silver have met the criteria for all of the above and thus, have always proved to work well as money.
The government can turn paper into money by accepting the paper for payment of taxes. Also, government can enact legal tender laws where the creditor must accept the government paper money for payment of debts. Gresham’s law comes into effect once the paper money enters the economy. Gresham’s law is summarized as “bad money drives out good money”. People will always trade their lowest quality money first so the lower quality money drives out the higher quality money. Once paper money appears, hard money (gold, silver, and copper) will disappear as people prefer to pay with the paper money and creditors have to accept the paper money due to legal tender laws.
Note that Gresham’s law can drive gold and silver out of circulation also:
The Coinage Act of 1792 established the US dollar as 371.25 grains of silver or 24.75 grains of gold. This established a government ratio of 15 ounces of silver to 1 ounce of gold. In the late 18th century there was a large production of silver from Mexico and the market ratio of silver to gold increased to 15.75 to 1 by 1805. The government ratio, however, was still 15 to 1. This was enough incentive for people to exchange their silver coins for gold coins at the government ratio, melt the gold, and sell the gold bullion overseas at the market value. Thus, gold coins disappeared from circulation as people either hoarded the gold or sent it abroad. People used the overvalued silver coins (i.e. the “bad” money) domestically and gold coins disappeared from the market.
In an attempt to correct the problem of disappearing gold coins the Coinage Act of 1834 was enacted. It kept the US dollar at 371.25 grains of silver but changed the definition to 23.2 grains of gold which established a government ratio of 16 to 1. This was close to the market ratio of gold to silver at the time so both gold and silver coins appeared in circulation again. The gold rush of 1849 produced a lot of gold and the market ratio of silver to gold became 15.46 to 1. Now gold was overvalued so people began exchanging their gold coins for silver coins at the government ratio, melt the silver, and sell the silver bullion overseas at the market value. People used the overvalued gold coins (i.e. the “bad” money) domestically and silver coins disappeared from the market.
Anything can be currency: all it takes, is for at least two parties to agree that it is a currency. That's all it takes. Nothing more complex than that.
It helps if it's divisible and not ephemeral, but they're neither necessary nor sufficient conditions.
No, it's no longer the case that gold and other precious metals are money, in almost all of the world. You might conceivably find some war zones where they might still be used for money (see, for example, the Libertarian paradise of Somalia).
Governments can make anything work as money, if they agree to accept it as payment for enforceable tax debts.
In some, but not all cases, a government denoting something as legal tender is enough to make it an effective currency. However, as with pretty much any other definition of currency, you can find exceptions. For example, in the case of legal tender, the Saddam Dinar was legal tender in Kurdistan, but it was the Swiss Dinar that was the accepted currency.
Money is money because people believe it is money. When you have an expectation that $5, (or a coin made out of a certain amount of copper/silver/etc) will buy you dinner / a movie / whatever, then you will be willing to accept it in exchange for labor or other services.
All a fiat currency needs to do to be legitimate and useful is maintain a sufficient level of predictability. For well-established currencies like the US Dollar, this is only really a problem when there is a change in the supply of money which fails to match a change in the amount of economic activity which the money supply represents: fiat money is subject to supply and demand as well, and when there is more money chasing the same amount of goods and services, people will wise up and adjust their expectations to account for that change.
If the change is too extreme, then people wise up and you end with some hyperinflation scenario, like Zimbabwe printing $50 trillion banknotes which couldn’t buy a loaf of bread, and then the currency pretty much has to be abandoned because that expectation of stability is gone. In places with a corrupt government abusing a fiat currency, there will usually be a different currency accepted on the black market (e.g. the US Dollar vs the ruble in Soviet Russia). If the changes are normally minimal, people will be happy with the currency (e.g. the dollar, mostly).
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