A good question recently came up on Quora:
What is the concept of currency? How am I simply able to buy things and services with just a piece of paper?
You have an item or provide a service someone else wants. They give you a token in return. You have needs for other items and services. Those providers accept your token.
Each token represents historic effort. The harder it was to produce or acquire that item, or the more effort it takes to perform the service, coupled with the rarity of item or service, the more tokens you’ll demand in exchange. The same for whomever is accepting you tokens.
Thousands of years ago, those tokens were bits of rare metal. Originally metal of various shapes and sizes and purity. Someone speaking Greek in Anatolia and someone speaking Chinese in China both eventually realized it would be more convenient to everyone to standardize the shale and purity of that metal. We call those coins. Later another Chinese man realized he could leave the coins at home and carry a piece of paper promising to trade them for the paper. A Venetian copies that idea and it took off across Europe. We call that paper money.
Later still many governments realized the metal in the vault was not only superfluous but getting in the way of economic growth. We call that modern fiat currency.
All of those are nothing but tokens of historic effort, accepted because everyone finds them convenient to accept. Far more convenient than keeping track of favors, which is the only alternative humans have found (see Debt: The first 5000 years).
