Evolution of MoneyEvolution of Money

Chapter # 2Chapter # 2

Evolution of Money. Evolution of Money.

• In the earlier stages of human civilization, In the earlier stages of human civilization, to satisfy man needs, barter system took to satisfy man needs, barter system took place.place.

• After that with the passage of time man After that with the passage of time man used so many other ways of satisfying its used so many other ways of satisfying its needs and wants which led to various needs and wants which led to various stages of use of money as a medium of stages of use of money as a medium of exchange.exchange.

• Like Commodity money, Metallic money, Like Commodity money, Metallic money, Paper money, Credit money, Electronic Paper money, Credit money, Electronic money etc.money etc.

• All such stages of money are used as a All such stages of money are used as a medium of exchange to solve the medium of exchange to solve the difficulties of barter economic system.difficulties of barter economic system.

Stages in the evolution of MoneyStages in the evolution of Money

The money came into being from different The money came into being from different stages in different time periods. Following stages in different time periods. Following are the different kinds or stages of are the different kinds or stages of money…money…

• Commodity moneyCommodity money• Metallic moneyMetallic money• Paper moneyPaper money• Credit moneyCredit money• Electronic money Electronic money

Commodity money Commodity money

• A large number of commodities or items A large number of commodities or items has served as commodity money at has served as commodity money at different time and places. different time and places.

• Such as, cattle like goats, horses, cows, Such as, cattle like goats, horses, cows, sheep, etc and other precious items were sheep, etc and other precious items were used as money. used as money.

• There were some problems in storing, There were some problems in storing, transportability, durability and divisibility of transportability, durability and divisibility of such items as money, which led to an such items as money, which led to an other stage of money in terms of some other stage of money in terms of some precious metals like gold, silver and precious metals like gold, silver and copper which is known as metallic money. copper which is known as metallic money.

Continue…Continue…

For Example:For Example: Romans used cattle and salt as Romans used cattle and salt as

money at different times.money at different times. The Mongolians used skins as The Mongolians used skins as

money.money.

Metallic Money Metallic Money • Metallic money stage has been divided in three Metallic money stage has been divided in three

stages;stages;• Cheap MetalCheap Metal• Precious Metal Precious Metal • CoinsCoins

• Cheap MetalCheap Metal• Cheap metals like copper and tin were used as Cheap metals like copper and tin were used as

standard of value. But there was need of standard standard of value. But there was need of standard weight and purity of those metal, so a stamp was weight and purity of those metal, so a stamp was used to provide guarantee about the weight and used to provide guarantee about the weight and purity.purity.

• Precious Metal Precious Metal • The next form of money was the use of some The next form of money was the use of some

precious metals such as gold, silver as a medium precious metals such as gold, silver as a medium of exchange. The ratio of one metal to other was of exchange. The ratio of one metal to other was declared by the state. The age of precious metals declared by the state. The age of precious metals has been ended after two world wars.has been ended after two world wars.

• CoinsCoins

• Accordingly metal was made into coins of pre-Accordingly metal was made into coins of pre-determined (pre-decided) weight.determined (pre-decided) weight.

• This innovation is attributed to King Midas of Lydia This innovation is attributed to King Midas of Lydia in the 8in the 8thth Century B.C. Century B.C.

• But some economics says that gold coins were in But some economics says that gold coins were in use in India many centuries earlier than Lydia.use in India many centuries earlier than Lydia.

• Some economists says that coins were minted in Some economists says that coins were minted in temples more than 2500 years B.C. The standard temples more than 2500 years B.C. The standard of weight and fineness was necessary.of weight and fineness was necessary.

• As a metal there was no guarantee of purity and As a metal there was no guarantee of purity and weight of metal as this defect was removed by weight of metal as this defect was removed by coins. coins.

• Some coins had an intrinsic value ( value in Some coins had an intrinsic value ( value in themselves ), which was reflected in their face themselves ), which was reflected in their face value these coins were also known as full bodied value these coins were also known as full bodied coins.coins.

• As the price of gold began to rise , then As the price of gold began to rise , then Government mix copper and silver in gold coins Government mix copper and silver in gold coins because the gold was becoming scarce and because the gold was becoming scarce and expansive with the passage of time.expansive with the passage of time.

• But again there were some problems in such kind But again there were some problems in such kind of money which led to establishment of paper of money which led to establishment of paper money.money.

• Types of Coins;Types of Coins;

• Full bodied coins Full bodied coins (face value is equal to the (face value is equal to the intrinsic value of coin).intrinsic value of coin).

• Token coins Token coins (face value is greater than intrinsic (face value is greater than intrinsic value).value).

Paper Money Paper Money

• After metallic money the next development in the After metallic money the next development in the payment and transaction system was paper money payment and transaction system was paper money which includes currency notes issued by the which includes currency notes issued by the central bank of country. central bank of country.

• Some Economist believe that the paper money has Some Economist believe that the paper money has been originated from China, as the China was the been originated from China, as the China was the inventor of paper in 9inventor of paper in 9thth century. century.

• From the middle of 8From the middle of 8thth century to the middle of 17 century to the middle of 17thth century, the Chinese emperor and the Mongols century, the Chinese emperor and the Mongols made an extensive use of paper money.made an extensive use of paper money.

• Iran also made some unsuccessful use of paper Iran also made some unsuccessful use of paper money in their economy in the middle of 13money in their economy in the middle of 13 thth century.century.

• But in the late 17But in the late 17thth century convertible paper century convertible paper money was issued on large scale by a wide variety money was issued on large scale by a wide variety of institutions by almost all the developed countries of institutions by almost all the developed countries of the world.of the world.

• But some Economics says that the origin But some Economics says that the origin of paper money has been started with of paper money has been started with Goldsmith and the people at that time was Goldsmith and the people at that time was keeping their gold and silver for the safe keeping their gold and silver for the safe custody with them.custody with them.

• For that Goldsmith was issuing a receipt to For that Goldsmith was issuing a receipt to them of the equivalent value of gold and them of the equivalent value of gold and silver which was then used as a medium silver which was then used as a medium of exchange.of exchange.

• Later on this practice brings the idea of Later on this practice brings the idea of paper currency in the mind of government. paper currency in the mind of government.

• Paper currency has the advantage that it is lighter Paper currency has the advantage that it is lighter than coins. Paper currency is legal tender by the than coins. Paper currency is legal tender by the state. state.

• The drawback of paper currency is that payment in The drawback of paper currency is that payment in large amount is difficult to count and it is also large amount is difficult to count and it is also difficult to carry a huge amount of paper currency difficult to carry a huge amount of paper currency from one place to another place, such drawbacks from one place to another place, such drawbacks are overcame by the use of credit or bank money. are overcame by the use of credit or bank money.

Credit or Bank MoneyCredit or Bank Money• With the passage of time banking system is With the passage of time banking system is

introduced in the economic sphere of life which introduced in the economic sphere of life which brought about an easier and modern system of brought about an easier and modern system of payment in transactions in terms of credit money.payment in transactions in terms of credit money.

• ““Now a days the transactions are made through the Now a days the transactions are made through the

payment and receipts of bank cheques, draft and bill payment and receipts of bank cheques, draft and bill of exchange etc, all such means for making of exchange etc, all such means for making payments and receipts in transactions is known as payments and receipts in transactions is known as credit or bank money.”credit or bank money.”

• These instruments were accepted on the basis of These instruments were accepted on the basis of actual money deposited in the bank.actual money deposited in the bank.

• Check is not a legal tender because it by itself is Check is not a legal tender because it by itself is not money it can not be enforced in payment of not money it can not be enforced in payment of debt. debt.

• Although in most of the developed countries most Although in most of the developed countries most of the businesses done through credit money.of the businesses done through credit money.

Electronic Money Electronic Money

With the development of computers and With the development of computers and advanced communication technology, advanced communication technology, transactions became more easier. transactions became more easier.

Through advanced computerized banking Through advanced computerized banking system new ways of payments and system new ways of payments and receipts for transactions are introduced receipts for transactions are introduced such as, ATM cards, credit cards. Such such as, ATM cards, credit cards. Such means of computerized transactions are means of computerized transactions are known as electronic or plastic money. known as electronic or plastic money.

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