6 Stages of Evolution of Money

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Money is a means of exchange that helps to facilitate trade and commerce. It is used to buy goods and services, and it can also be used to provide financial security in the event of a crisis. Money is also a store of value, which means that it can be saved and used in the future. Using money eliminates the double coincidence of wants and barter’s inconveniences and difficulties. By introducing money as a medium of exchange, the single barter transaction is broken up into separate sales and purchases, eliminating the double coincidence of wants. Instead of exchanging commodities, we exchange money directly.

Evolution of Money

The following are the stages of evolution:

  • Commodity money
  • Metallic money
  • Paper Money
  • Bank Money or Credit Money
  • Plastic Money
  • E-Money

Commodity money

From the dawn of human civilization, a variety of commodities were used as money. Hunting societies used stones, spears, skins, bows and arrows, and axes as money. In pastoral societies, cattle were used as currency. In agricultural societies, grains were used as money. Salt and cattle were used by the Romans at various times.

In Mongolia, squirrel skins were used as money. There were a wide variety of commodities used as money, depending on the time, place, and economic standard of the society, such as precious stones, tobacco, tea shells, fishhooks, and many others.

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Limitations of Commodity money

  • Because of the lack of standardization, cattle, grains, etc., were not all of the same quality.
  • When it came to commodities such as cattle, there was the problem of indivisibility.
  • There was uncertainty about the supply of such commodities.
  • It was difficult to transfer them from one place to another since they lacked portability.
  • Perishable commodities are difficult to store and prevent loss of value.

Metallic Money

As civilization spread and trade relations increased, metallic money replaced commodity money. Silver, gold, copper, tin, etc., became popular as currencies. However, metal was inconvenient to accept, weigh, divide, and assess in quality.

In the eighth century B C, King Midas of Lydia invented coins with predetermined weights that were made from metal. The gold coin was used in India many centuries earlier than in Lydia. In this way, coins became a convenient method of exchange. Gold coins were melted to earn more money by selling them as metal as the price of gold rose.

This led governments to mix copper or silver in gold coins since their intrinsic value could exceed their face value. In the course of gold becoming increasingly scarce and expensive, silver coins became increasingly popular, first in their pure form and then mixed with alloys or other metals.

Limitations of Metallic money

  • For internal as well as external purposes, its supply could not be altered according to the nation’s needs.
  • As coins were heavy, merchants could not transport large sums of money in the form of coins.
  • Long distance trade of precious metals was unsafe and inconvenient.
  • The government had to spend a lot of money minting and exchanging metallic money because coins devalued because of their use.

Paper Money

As goldsmiths were considered honest merchants, people started to keep their gold with them for safe custody. As a result, paper money developed from goldsmiths’ safes. Goldsmiths gave the depositors a receipt promising they would return the gold upon demand. These receipts were given to commodity sellers by their buyers. As a result, goldsmiths’ receipts were a substitute for money. The paper money was backed by gold and could be converted to gold on demand. This led to the development of bank notes.

Bank notes are issued by the central bank. All countries in the world gradually stopped converting bank notes into gold and silver as the demand for gold and silver increased with the rise in their prices during and after the First World War. The bank’s money no longer represents money and is known as ‘fiat money,’ which is inconvertible and accepted as money because it is backed by law. The money made of paper is called paper money.

The central bank of a nation prints currency notes, while the government issues them. The Ministry of Finance of the Government of India issues all rupee notes and coins in circulation, while the Reserve Bank of India issues other currency notes and commodity coins of higher denominations.

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Advantages of Paper Money

Convenience: Transferring and carrying paper money is easy. It can easily be kept in the pocket, and it can also be easily converted into checks and drafts.

Cheap and economical: A paper currency is much easier to create. It costs practically nothing to the government. It requires special paper, ink, and printing technology. Though these things are expensive, overall printing costs are quite low.

Copying: It is very difficult to counterfeit paper money because of its design and special ink and paper used. Even if it is counterfeited, electronic machines can check its authenticity.

Saving of Precious Metals: The use of paper money saves precious metals of the country, which can be used for other purpose.

Elastic Supply: Due to its elasticity, paper money is very useful to governments. Money supply can be increased or decreased based on the needs of the economy.

Legal Tender: A paper note is unlimited legal tender, meaning that it can be used to pay any amount of debt or to settle any amount of payment.

Ease of counting: It is easier to count paper money than metallic money. The counting of large amounts in metal is quite difficult. But counting paper money is easy, convenient, and takes little time.

Useful in emergency: In emergencies like war and floods, the government can print notes in a short period of time to meet the expenses.

Uniform quality: Paper money also has the advantage of being of uniform quality, which means the holder does not need to worry about having new or old money.

Disadvantages of Paper Money

Demonetization: If the government cancels the currency notes, the holder has to bear the full loss since paper money is fiat money. It is issued by order of the government.

Limited Acceptance: The disadvantage of paper money is that it has limited acceptance. It can only be used within the borders of the country.

Short life: In spite of the fact that paper currency is not affected by wear and tear, it can be damaged by fire or water. Because of this, paper currency has a shorter life span than metallic money.

Monetary mismanagement: Paper money’s purchasing power is always changing. This means that its face value remains the same, but its purchasing power may decline as a result of fiscal mismanagement.

Troubling balance of payments: Due to the overissuance of money, the value of money decreases, which causes inflation, which causes import prices to rise, since the devalued currency must be exchanged for foreign currency, resulting in a negative balance of payments.

Exchange rate instability: The value of paper money fluctuates with the exchange rate market, which also has serious effects on price levels.

Also Read: Rebate on Bills Discounted

Bank Money or Credit Money

In the modern world, cheques are also used as currency. They function in a similar way to bank notes in that they transfer money or obligations from one person to another.

There is a difference between a cheque and a bank note. An actual cheque is an order to transfer money that is written for a specific sum and expires with a single transaction. It is not money at all. These days, however, large transactions are mostly done with cheques, and bank notes are generally used only for small ones. Also, credit cards and debit cards issued by banks are also classified as bank money.

In modern economies, with the development of banking activity, credit money has become a widely used form of money. Banks’ demand deposits, which can be withdrawn via cheque, serve as money and are accepted for payment as cheques.

The cheque is not money by itself, but is a credit instrument that performs the same functions as money. That is why credit money is considered near money.

Among the sources of money in a modern economy are currency money (paper money and coins) and bank money. The percentage of bank money in the total money supply increases as an economy becomes more advanced.

Plastic Money

Single or limited purpose cards: There are cards that can only be used in a specific store or group of stores, or for a specific use, such as those issued by Big Bazar, Lifestyle, etc.

Debit Cards: The debit card provides electronic access to the cardholder’s bank account(s) at a financial institution through a plastic payment card. While some cards allow a payment to be made with a stored value, the majority relay a message to a cardholder’s bank for the withdrawal of funds from a payer’s account. When making purchases, the card can be used in place of cash, where it is accepted. The primary account number may only be used online in some cases, and there is no physical card associated with the account. The use of debit cards has become so widespread in many countries that checks and cash transactions have been entirely replaced by their volume.

Credit Cards: Credit cards are payment cards issued to users as a method of payment. They are used to pay for goods and services on the basis of the cardholder’s promise to pay. A revolving account and a credit line are provided by the issuer of the card to the cardholder, allowing the user to borrow money from them as a cash advance or for payment to merchants. The balance of a charge card must be paid in full each month unlike a credit card. As opposed to cash cards, which can be used as currency by the owner of the card, credit cards allow consumers to carry a continuing balance of debt, subject to interest charges. Additionally, a credit card differs from a charge card in that the buyer defers payment to a later date with a third-party entity that pays the seller and is reimbursed by the buyer.

Electronic Money (E-Money)

An evolution of online banking, e-money is a new age money system. It is also called online banking and is the logical extension of the PC banking system. Through e-money, one can conduct banking activities such as transferring funds, paying bills, viewing checking and savings account balances, paying mortgages, and purchasing financial instruments and certificates of deposit via the internet.

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