Continuing the analysis, let us "regress" to the very first "day" when the good was used as money. Clearly, its marginal utility on that day could not have been based on previous money prices, and hence its value must have derived from non-monetary uses. For a good to become accepted as money, therefore, it must first have immediate use-value as a commodity rather than a mere object of exchange. On the other hand, once it has become established as a money, it is possible for its non-monetary utility to disappear without destroying its monetary value.

Because it was inconvenient to carry large numbers of gold coins or bars, it became customary to pay for goods with paper notes, which could, at the recipient's request, be exchanged for certain quantities of gold. The gold itself was stored in warehouses, known as banks. Each paper note represented a contract between the banker and the bearer of the note. In this manner paper money came into common use.

In a technologically advanced free market, money might be represented by electronic transactions, based on a similar gold standard. The history of money will be pursued further in a later subsection, where we will analyze the effects of governmental intervention into the market.

^Previous