What is money? It has multiple functions in our everyday lives. For most of us, money is something we receive as wages, something to pay our debts, to purchase things, to collect as credit, and to save for the future. In Smithian economics, money is first of all a commodity that can be used in the trading of other commodities. In other words, it is primarily a medium of exchange. Gold coins, for example, are commodities – they can be bought and sold, but they also function as a medium for exchanging other commodities. That is the theory. The theory also holds that money is what Geoffrey Ingham calls a “neutral veil,” which means that it merely symbolizes the real exchange ratios between other commodities. Money, in other words, should not be an issue. This view gives us a picture of money as a means for effective transactions. It does not explain how money became such a trustworthy medium of exchange.

Imagine that someone, let's call him Adam, goes into a second-hand shop and sees a used guitar he would like. It is priced at $60. Adam only has $50. The conversation proceeds as follows:

Adam: “I will pay you $50 for the used guitar there.”

Shopkeeper: “Sorry, but the guitar is well worth $70.”

Adam: “I am not disagreeing with you about the price of the guitar, I just think a dollar is worth more than you do. I think that 50 dollars should buy the guitar, not 60.”