One often hears stories about civilised and pre-civilised societies using shells, bones, and other trinkets as currency. How exactly did this system work? Taking the example of shells, did they have to be the same type of shell, have the same weight or was the system completely arbitrary?
These are the basic characteristics of a currency:
- easy to carry: if you have something to exchange, you should be able to relocate and carry it where ever you wish. If you can do that, it is practical to make it currency. This characteristics formed shells and other smaller stones, shiny things like silver and gold and precious stones to currency.
- rare: rare things are good to make it currency, so if you posess a certain amount of it, ensures you are richer than those who owns less. This characteristics made precious stones, silver and gold to be currency.
- hard to copy: connected to rare characteristics. You can't make gold. So you can't make yourself rich only by producing the currency. If a currency is infinitely reproducable, the value is zero. That's why all the gold, silver and even paper money is valuable, you can spot the false ones.
- accepted: mutual acceptation is needed. If an item is accepted by a lot of people, it serves as a currency, no matter what is it. For example in England there were wooden sticks as currency, signed by king. The wood itself worthless, but a higher authority forced to be accepted widely, so it is currency. A little less autocratic currency was salt in the ancient times. It wasn't easy to get, and it had value as food. Even if it wasn't the most practical currency it made it's way to be accepted widely, and the people started to measure value in a volume of salt.
- comparable: this is easy the be fulfilled. If a currency is comparable to other amounts of currencies. This allowes exchange rates, and refines the values. You can make prices for a cow, an entire village or even just for an arrow. Therefore alone the gold wasn't currency, it needed to be divided to tiny pieces, so it was said I give 20 ounces of silver to an ounce of gold, so you don't have to divide your gold to microscopic pieces to buy just an arrow head.
- Hard, durable: as Tom Au wrote.
Did I miss something? Feel free to expand the list!
Overall why were for example shells good for currency?
It was pretty durable, rare, hard to copy, easy to carry. And if you want to compare, you could say I give 5 shells for a big and nice one, so on some primitive barter level, it was comparable.
Further information on early economics here is a link to Aristotle' work "Politics", you might find good information in the linked first book, IX. chapter
Shells, bones, etc. worked as currency because they were "hard," and durable, and because (small groups of) people could come to an agreement on their value. The same was true of more "advanced" currency based on coins of metals such as copper, silver, or gold. Thus, they functioned as a store of (monetary) value.
It is probably worth supplementing @TomAu's answer with Marx on Value, first three chapters of Volume 1. Somewhat idealist, but it contrasts different uses of money well. Clearly points out that specie is "fiat". Dave Graeber's Debt: The First Five Thousand Years. A more anthropological account, but again, points out the social construction of currency.
A big part of this depends on whether you consider "rarity" (labor input production cost) to be a determinate factor in the viability of currency. The search and selection "costs" to an early agricultural or high intensity protein gathering economy of picking out "shells such as this," is a considerable embodiment of social time spent. But at what point is this fully currency, and at what point destructive display of wealth? Time for Graeber's anthropology probably.