This is post is taken from the Frequently Asked Questions.

Early people bartered. Say you grow apples and your neighbor is a fisherman. You exchange a certain number of apples for his fish. However, what if you only have apples and your shoemaker only wants fish at the moment? You’d have to first exchange the number of apples with your neighbor in order to get enough fish to trade with the shoemaker. What if the neighbor with the fish doesn’t want to trade or doesn’t have enough fish? There is a coincidence of wants.

Barter does work even to this day but is very inefficient when it comes to larger economies.

Larger economies require a money that does not otherwise have any other utility besides being valued as money. Money used at scale should not be able to be consumed or otherwise used for anything other than its ability to coordinate trading of goods or services.

Basically, money needs to be a good store of value.

Taken from the excellent article by Vijay Boyapati called The Bullish Case for Bitcoin, an ideal store of value should be:

1. Durable: must not be perishable or easily destroyed. Food, therefore, is not a good store of value because it spoils.
2. Portable: must be easy to transport and store against loss or theft. Apples are fairly easy to transport in small amounts but if you are purchasing a larger item, the amount needed would be unmanageable. 
3. Fungible: one item of the good should be interchangeable with another. There should be no difference in quality between any of the items.
4. Verifiable: the good must be easy to identify as authentic. 
5. Divisible: the good must be easy to subdivide.
6. Scarce: the good must not be abundant or easy to create.
7. Established history: the longer the good is perceived to have been valuable, the greater its appeal as a store of value.
8. Censorship-resistant: how difficult is it for a third-party to prevent the owner of the good from using it?

Gold has historically served this purpose. It fits many of the characteristics of a good store of value. Governments for thousands of years issued their currencies backed in gold or other rare metals for many of the above reasons.

However, one of the main issues with gold is that it is difficult to transport in any large quantity. It is not portable. It is heavy and transportation of larger amounts of it is slow and costly.

Due to the need to transact quickly and over long distances, banks were developed which acted as a trusted third-party so that you could transact with representations of the available gold that you had in the bank.

Rather than paying you 2 units of gold by physically cutting off a little chunk of gold, I could just tell my bank to change ownership of those two units to you. 

We would never have to even interact in the gold that backs the currency.

This requires us to trust the ledgers of the banks. In a full reserve system, all the paper certificates that represent the gold stored in the bank are redeemable.

Eventually, banks and governments realized that they could issue more paper money than exists in physical gold. This was similar to what happened when the currency itself was the gold coin. Governments would assign the same value to the coin but little by little decrease the amount of gold that the coin had. They could either do this by changing how they weigh the coin, by chipping little bits off of the coins, or by changing the formulation of the coins to contain less a percent of gold. This is effectively the same thing as printing more paper certificates that have no actual backing. 

Currently, the major currencies are all called fiat currency. Fiat comes from Latin meaning “let it be done.” Despite what you still might think, fiat currencies including the US dollar are no longer backed by gold or silver.

In 1971, Nixon took the US (and effectively the rest of the world) off of the gold standard. From that point on, the US dollar became a fiat currency. It no longer had convertibility into gold or other precious metals.

As governments finance projects by the creation of currency, the value of each unit of currency drops. There have been a number of examples of hyperinflation throughout recent history.

The US is not immune from inflation either, as you can probably tell from the cost of your groceries or how incomes have not kept up with the price of real estate. Today’s young adults are nearly close to getting priced out of being able to afford a house. House ownership is happening much later in life than our parents’ generation. This may be one of the reasons why young families are choosing to delay having children.

A $500,000 house today would be the equivalent of a $165,000 house 40-years ago. This inflation calculator can be adjusted yourself at https://www.usinflationcalculator.com/ and is likely to be underestimating the actual inflation since it relies on Consumer Price Index (CPI )data published by the US government. The calculations behind CPI have been adjusted over the years and actual inflation is likely to be much higher.