Money is one of the greatest inventions of the modern world. Money is the accepted medium of exchange. With money, one can have any commodity or service holding monetary value. Money is something we use daily many times in a day but have you ever wondered how will we purchase the goods or avail the service without using money as a medium of exchange. Well, there was a time when there was no such thing as money.
In this article, we are going to discuss the evolution of money.
Before knowing about the evolution of money we need to know what money is.
What is money?
In most basic terms we can say money is an item or object that is accepted as payment of goods and services. Thus money act as a medium of exchange. In India, money consists of coins and notes. The notes (paper money) are printed by the central bank i.e. Reserve bank of India while the coins are manufactured by the Ministry of Finance. There is a number of functions that are performed by money. Here, we are discussing some of the major functions of money:
Act as a medium of exchange
The first and foremost function of money is that it act as medium of exchange and facilitate transactions.
Measure of value:
The second function of money is that it serves as a common measure of value. All goods and services can be measured in terms of money and you can easily buy them in exchange for money.
Store of value
The third major function of money is that money serves as a store of value. Store of value means something that retains its purchasing power into the future such as gold, land, silver, other precious metals, etc. although money act as a store of value but its value depreciates with inflation. However, money is one of the best stores of value due to its liquidity. Thus, we can hold money for our future needs and store our wealth.
Why should we accept these notes or coins?
These notes or coins are legal tenders. Legal tender is something that is recognized by the law as an instrument to make payment.
Why can we not print money ourselves according to our need?
Well, that is not possible. Only the central bank i.e. Reserve bank of India is authorized to print the notes according to the need of the economy.
Evolution of money:
Commodity Money/ Barter System: The barter system is the system that was prevalent before the money came into the system. In this type of payment system, the goods were exchanged for goods like salt, wheat, utensils, etc. For example, I want to buy shoes and sell socks then I have to find a person who wants to sell shoes and needs shocks also. So there is a double coincidence of wants. The problem with this system was that it was very costly to find the other party in the trade.
Metallic Money:
There were a number of problems and challenges that were faced in the barter system such as lack of a common measure of value, lack of double coincidence of wants, difficulty in storing value, etc. these problems and challenges led to the evolution of a new stage that is metallic money. Metals like gold, silver, copper wire used for manufacturing the coins. With the generation of these coins, people were able to come over the drawbacks of commodity money.
Paper Money:
With metallic coins, it was neither safe nor convenient to carry the gold and silver coins from one place to another. Therefore, the need for paper money emerged. Paper currency marked a very important stage in the evolution of money which became one of the most acceptable forms of money. This is the form that is prevalent worldwide. In India, money is issued and regulated by the central bank i.e. Reserve Bank of India.
Credit money:
With the increase in the number of transactions, it led to some challenges such as huge time investment to count the money and keeping it in a safer place. These challenges led to the emergence of credit money which is also known as bank money. Money in form of cheques, demand draft, bill of exchange, etc. have overcome the drawbacks of paper money and has also facilitated convenient transactions. Nowadays people majorly keep their money in banks which they can withdraw via cheques as per their convenience.
Plastic money:
Plastic money provides the facility to make transactions without the involvement of cash or paper money. People are able to make small and larger transactions on the spot via cards without carrying cash with them.
The money is constantly evolving according to the needs and technological innovations. All over the world, countries are trying to become a cashless society which means less use of cash and more digital transactions. In this regard, India has also taken major steps such as Jhan Dhan accounts, e-wallets, etc. there is a number of advantages of digital transactions such as security, convenience, transparency, etc.
FAQs
There are more than five stages of money's evolution. Still, five notable stages include: commodity money (i.e., grains, livestock), metallic money (i.e., coins), paper money, credit and plastic forms of currency, and digital money.
What is the theory of the evolution of money? ›
Commodity theory asserts that money has evolved spontaneously from one of the useful commodities through a long process of barter exchanges, and cartal theory argues that money was introduced by a communal agreement or political decree or legislative action that is external to the exchange process.
What is the conclusion of evolution of money? ›
The Evolution of Money Meaning
It also acts as a store of value and a unit of measure. The evolution of money is a series of development in the form of the acceptable medium of exchange throughout history. But why is money so important? Money is important because it allows us to obtain the things we need and want.
What are the functions of money and the evolution of money? ›
A means of exchange: money is widely accepted in return for goods and services. A store of wealth: money is to retain purchasing power into the future. A unit of account: money must act as a common denominator in trade, used to interpret prices and denominate the value of goods and services.
What is the oldest currency? ›
The British pound is the world's oldest currency still in use at around 1,200 years old. Dating back to Anglo-Saxon times, the pound has gone through many changes before evolving into the currency we recognise today. The British pound is both the oldest and one of the most traded currencies in the world.
What is the next evolution of money? ›
The future of money is expected to be heavily influenced by technology. Predictions include the rise of cashless societies, the growth of cryptocurrencies, the continued adoption of digital currencies, and the potential offering of a Central Bank Digital Currency (CBDC) by governments.
How long will it take for the money to change? ›
Which money will change under King Charles? Though we'll soon get a glimpse of what our new banknotes will look like, they aren't expected to enter circulation until mid-2024. All four denominations — £5, £10, £20 and £50 — are set to be updated with the new designs.
Where does money come from? ›
In most modern economies, money is created by both central banks and commercial banks. Money issued by central banks is termed reserve deposits and is only available for use by central bank account holders, which are generally large commercial banks and foreign central banks.
Where is money made in USA? ›
The Bureau of Engraving and Printing receives the print order and manufactures Federal Reserve notes at its facilities in Washington, D.C., and Fort Worth, Texas. To get a more detailed look of how banknotes are made, Discover more about how banknotes are made.
Who invented currency? ›
No one knows for sure who first invented such money, but historians believe metal objects were first used as money as early as 5,000 B.C. Around 700 B.C., the Lydians became the first Western culture to make coins. Other countries and civilizations soon began to mint their own coins with specific values.
The first known banknote was first developed in China during the Tang and Song dynasties, starting in the 7th century. Its roots were in merchant receipts of deposit during the Tang dynasty (618–907), as merchants and wholesalers desired to avoid the heavy bulk of copper coinage in large commercial transactions.
Is credit real money? ›
Credit money is the creation of monetary value through the establishment of future claims, obligations, or debts. These claims or debts can be transferred to other parties in exchange for the value embodied in these claims.
What gives money its value? ›
Summary. Currency value is determined by aggregate supply and demand. Supply and demand are influenced by a number of factors, including interest rates, inflation, capital flow, and money supply. The most common method to value currency is through exchange rates.
Why are checks debit cards and credit cards not money? ›
By defini- tion, currency and demand deposits are money, while checks, credit and debit cards are not. This is because currency and checking deposits are their owner's assets, whereas a check or a credit/debit card is not a part of its owner's assets. transactions, though it is not a medium of exchange.
What is the animal money? ›
1. Animal money: in protohistoric period 'animal money' was used as a means of exchange, e.g. cow sheep goat etc. however due to their indivisible nature, commodity money came into existence.
What are the stages of the life cycle of money? ›
Life cycle financial planning can be separated into five stages: teenage years (13-17 years old), young adulthood (18-25 years old), starting a family (26-45 years old), planning to retire (45-64 years old), and successful retirement (65 years old and above.)
What are the 4 steps of money? ›
4 Steps to Financial Success
- Step 1: Know Your Numbers. Comparing your income to monthly payments will help you budget for savings. ...
- Step 2: Protect What's Yours. Insurance is the best defense against the unexpected. ...
- Step 3: Fund Your Future. How do you see your retirement? ...
- Step 4: Build Your Wealth.
The Mesopotamian civilization developed a large-scale economy based on commodity money. The shekel was the unit of weight and currency, first recorded c. 2150 BC, which was nominally equivalent to a specific weight of barley that was the preexisting and parallel form of currency.
