All money is just a matter of belief  — Adam Smith

When this started?

So, the story starts since 6000BC when the concept of barter system arrived, started by Mesopotamian tribes in which people used to trade their goods without the use of money. If a farmer has food grains,  and he wants some clothing for himself then he will approach a tailor who wants food grains and can exchange his cloth for it and the trade was  settled.

But there was lot of problems in barter system one of them was  for a trade to be settled both parties must agree. You want what I have but I don't want what you have then trade will not be settled.  So there was no common means to exchange their goods.

This led to the beginning of commodity money (commodity money is not the money we use commodity money is something which is rare and which everyone requires like cow, goat, knife, animal skins, tobacco and many more)

Commodity money made life easier to a particular extent but the problem that it had was it became very difficult to predict the actual value of the commodity which one had as every commodity had its own value .

Metallic Money

Metallic money first evolved in ancient Greek  around 600BC , coins were made using the mixture of gold and silver with lions and bull designs on it.

This is the image of the first metallic money invented in Greek called Lydian Stater. After the invention of Lydian Stater every Emperor started making its own currency and trade become very easy through it . But when overseas trading was at its peak the problem arose during shipping of these coins because it was very difficult to carry coins due to their weight and it required lot of time to count them.

This lead to the invention of Paper Money, which was started first in China by Kubla Khan (grandson of Genghis khan). The first paper money was made from bark of tree with "I OWE  YOU" (IOU) which means I owe you a debt written on it. Kubla Khan asked people to take his paper money in exchange of their coins or any other precious material and told them that they can come and collect their coins whenever they want by showing this paper money. Those who didn't accepted was sentenced to death. After the circulation of this paper money in the market people didn't bother to exchange it with gold instead they decided to trade this paper money.

Later this idea circulated around the globe and led to the formation of something which was unstoppable called banks. Since bank had the capability to manufacture paper money and lend it to  people so people went to banks and exchanged their gold coins for paper money because there was risk of their gold coins  being stolen . And paper money was something that banks could print without limit, and as we know, banks earn by lending money to people who promise to repay the loan. After a lot of lending, a huge amount of paper money circulated in the market , everyone had this paper money in their hands . This lead to increase in prices of products and other items which we call as inflation. Inflation arose because of excess of demand in the market which occured because eveyone had paper money in their hands. The product that costed 10 IOU now was costing 100 IOU and when people realised that the value of their IOU is decreasing then they rushed towards the banks to get their gold back but banks didn't have enough gold to give it to people and  finally,  the banking system collapsed.

After this disaster people lost their faith in banks and they decided to keep their gold coins with them and due to this circulation of money decreased in the market and new problems started arising.

After hundreds of years,  In 1816,  Great Britain adopted the gold standard in which it was decided that the goverment will only print paper money which is equivalent to gold or in other words,  the paper money was backed or pegged to gold and they decided that loans will also be  given in a limited quantity. Gradually more countries started adopting the gold standard and finally in 1900 USA adopted the gold standard. But the problem of low circulation of paper money was still there, people didn't had money prices were low, companies didn't had enough money to pay salaries and this led  to this depression which started in 1930 in USA.

To solve this,  in 1933 US President Franklin D. Roosevelt announced the end of  the gold standard. As a result  banks regained the power to print money. To control the flow of money in the market FED(Central Bank of USA) was made whose work was to keep a balance of money circulated in the market to prevent inflation , deflation and depression as well. Now the paper money existed had no value in iteself it was just a peice of paper which is called Fiat Money.

Fiat money is a peice of paper which is not backed by gold or any physical commodity. Fiat money existed because of people's beleif that through it they could settle trades and purchase anything.