Well, what is money, anyway?
First we have barter. But that’s inconvenient, because if you have chickens and want baskets, you have to find someone who wants chickens but has baskets.
So the first step is the concept of the key good. This is a good that portable, durable, divisible, and widely accepted as barter, even by people who don’t neccesarily want the good, because they know they can easily trade it to someone else later for what they really do want.
So there are certain types of goods that make good key goods. Cowrie shells, cattle, whiskey, cigarettes, cacao beans and so forth have all been used as key goods. But precious metals are even more useful key goods. If you have a lump of gold or silver you can make it into jewelry or other ornaments. But so can someone else. And so you can take an ingot of gold from one side of the world to another, and trade it for other goods when you get there.
So metal ingots became a standard key good all over the ancient world. And these metal ingots were the first coins. And governments started creating standardized metal ingots for ease of trade so you didn’t have to weigh each lump.
So silver coins have been used since ancient times as a form of money. Gold coins too, but gold is rarer than silver, and so is valued more highly. So gold coins were judged to be worth more than silver coins. American silver coins were simply a continuation of the ancient practice of using silver as a key good.
Of course, then people realized that you didn’t have to carry around bars of silver or gold. If you deposited your gold at a goldsmith’s shop in his safe, he could give you a reciept for you gold deposit. And if you wanted to buy something, you could hand someone the receipt for your gold or silver deposit, rather than a lump of metal. And if the person trusted you, and trusted the goldsmith, they would accept that reciept as payment, because any time they wished they could go to the goldsmith and get that metal.
And this is the first paper money, a promise by a bank that there exists a certain lump of metal, and if you go to the bank and present the receipt they will hand over the metal. But note that since metal is fungible, the bank doesn’t have to hand back a particular piece of metal…any old lump of silver or gold of a particular purity will do. And they don’t neccesarily have to have a lump of metal for each and every receipt they issue, they just have to have enough reserves to cover their normal business.
And then governments get into this business and issue paper money that can be exchanged for gold or silver. But the governments still have actual gold or silver in reserve, and if you take the paper money to the bank they’ll hand you gold or silver coins that are “real” money. Of course, the coins are only real money in the sense that people will accept them as payment for other goods and services, because gold and silver are “real” goods that have some sort of “real” value. But the value of a gold or silver coin isn’t handed down from on high, the gold or silver is just one more good in a whole marketful of goods, it’s just that the gold and silver are KEY goods. It’s because gold and silver have value that they were made into money.
Then governments get the idea that they don’t actually have to have ANY gold or silver in reserve. Just issue paper money, and declare that the paper money can be used to pay taxes. Governments had previously temporarily suspended payments in precious metals during various crises. During a war the government wouldn’t give you gold for your paper money, you had to accept greenbacks based on nothing more than the promise of the government that the paper money would be worth something.
And today’s fiat money is nothing more than a promise by various governments that money has a certain value. This is regarded with horror by people who think “real” money is backed by precious metals. But if the government can pass a law tomorrow and refuse to exchange your gold standard dollars for actual gold, what’s the difference between that and a paper dollar that never had any such promise?
