Notes on Stages of Evolution of Money

Tue, 10/08/2013 - 04:41 -- Umar Farooq

Stages of Evolution of Money

There were many difficulties and inconveniences in the barter system, around the globe there was a need for accepted medium of exchange. With the passage of time many other types of money emerged for the purpose of exchange. Following are some stages of evolution of money.

Commodity Money

Under commodity money, a large number of goods served as money, however the nature of goods varied from time to time and place to place for example agricultural goods, birds, slaves and animals etc. In order to facilitate the exchange of goods, the commodity money also lost its popularity due to the following reasons:

  1. Lack of Storability
  2. Lack of Divisibility
  3. Lack of Durability
  4. Lack of Transportability
  5. Lack of Homogeneity
  6. Lack of General Acceptability

Metallic Money

The commodity money due to certain drawbacks was replaced by metallic money. As metals were available from early times and were durable, portable and easily divisible therefore it got rapid popularity. This was the era of un-coined metals wherein gold, silver, copper and other metals were used as money. The popularity of metallic money is due to lack of homogeneity, scarcity, to secure metals etc.

Standardized Coinage

To make the process of exchange easier, the concept of standard coinage was adopted. Government took control over all the coins. Coins were stamped with a logo, with uniform weight and the value was guaranteed. These coins were standard as both their face and intrinsic (value in themselves) were equal. Standardized coinage was unable to catch the minds due to

  1. Too much time in extraction of metals from mines
  2. Scarcity of Metals
  3. Mobility

Representative Money

Before the emergence of paper money, the practice of representative money was in vogue. The system of commodity money was converted into the system of representative money. It is a kind of symbolic money which is based on useful goods. In the system grain banks, warehouses, gold smith etc. would issue a paper receipt to their depositors which indicated the nature of precious goods or other goods stored. Warehouse receipts (330 BC Ancient Egypt) were issued by a private or royal warehouse for the surplus food grains deposited by farmers. All receipts were issued against the available quantity of food grains. It was a convenient and generally acceptable method of exchange. The similar procedure was adopted by the gold smith bankers (17th century) England.

The system of trade bills or exchange was also functioning on the said analogy wherein goods were supplied to a buyer against a bill of exchange. That bill was basically the written promise of the buyer to make payment at some later stage or period of tie specified. Here two conditions were applicable that the buyer must be a credible person or there must be a guarantor. The seller could present the bill to a merchant banker and redeem it in money at a discounted value.

Paper Money

The emergence of paper money is a significant milestone in the evolution of money. On the pattern of the London goldsmiths, many banks began issuing paper money / banknotes. Different banks practiced it at different times such as in.

England up to 1694

Scottish banks until 1850

First the Private commercial banks issued paper money afterward the system was centralized as the bank of England was granted the authority to monopolize the issuance of currency after 1694, the Federal Reserve Bank in USA was granted the same authority in 1913. In the beginning all kinds of paper currency were convertible into gold or silver (Before 1914). This conversion was abolished after 1914 in England and after 1933 in America. Now all currency notes issued from the central banks are inconvertible or Fait money. By fait money we mean that money for which the central bank does not promise to convert it in the equivalent amount of gold or silver and it does not possess any intrinsic value rather it is backed by the government's order in which it is declared as legal tender money and the people are bound to accept to.

Credit Money

In this modern era banking system has made it essential to make payments for transaction through cheques. It is a safe and convenient way of transfer of value. Cheque is basically a representation of a particular amount and hence cannot be treated as legal tender or high powered money.

Electronic Money

Until now it is the last stage of evolution of money, this is the age of computer, now-a-days people avoid using cash and even cheques in their financial matters. Besides the credit money, they have now the facility of transferring money electronically which is quite effective in the context of time saving and safety. All kinds of debt cards, credit cards, ATM cards and smart cards are the examples of electronic money. Electronic money is not legal tender money.