Evolution of Money

Evolution of Money is probably one of the biggest invention in human history. The money was not invented but it evolved with passage of time according to the changing requirements of economies.
Evolution of money has passed through following six stages;

1. Barter
2. Commodity Money
3. Metallic Money
4. Paper Money
5. Bank money or Credit Money
6. Electronic Money

These stages of evolution of money are discussed as under.

Barter system

Barter is the exchange of products and services for other products and services. In a barter system, people do not use money for transactions. The verb ‘to barter’ means to exchange goods and services for other products and services.

Barter is possible only if the wants of the people are very few, area of exchange is limited and people are living a very simple life. There were many difficulties associated with barter system. So gradually this system of exchange was replaced with money system of exchange.

The main difficulties found in barter system:

• Double Coincidence of Wants
• Lack of a Standard Unit of Account
• Impossibility of Subdivision of Goods
• Lack of Information
• Production of Large and Very Costly Goods are not Feasible

Commodity Money

In the earliest period of human civilization, any commodity that was generally demanded and chosen by common consent was used as money.

Goods like skins, salt, rice, wheat, utensils etc. were commonly used as money.

It was difficult to borrow and lend and more difficult to measure and store the value of goods and services. Further the volume of trade remained very limited due problem of transportation of commodity money.

Metallic Money

Commodity money changed into metallic money. Metals like gold, silver, copper, etc. were used as they could be easily handled and their quantity can be easily ascertained.

The problem was transportation and storage of precious metals. This problem was solved by making standardized coins. In the beginning full bodied coins of gold and silver were introduced but latter on these were replaced with token coins.

Paper Money

It was found inconvenient as well as dangerous to carry gold and silver coins from place to place. So, invention of paper money marked a very important stage in the development of money.

Bank Money

Emergence of credit money took place almost side by side with that of paper money. People keep a part of their cash as deposits with banks, which they can withdraw at their convenience through cheques. The cheque (known as credit money or bank money), itself, is not money, but it performs the same functions as money.

Electronic Money

The latest type of money is electronic money in the form of Credit cards and Debit cards. They aim at removing the need for carrying cash to make transactions.