[PDF Notes] Short Essay on the Evolution of Money

Invention of Money

Increasing difficulties and inconveniences of the barter system led to the invention of money.

As the society developed, the division of labour and specialisation increased and, as a result, volume of production and trade expanded in such conditions, the barter system of direct exchange between various Commodus Created difficulties.

Such as, the problem of double coincidence of wants, the problem of common measure of value, etc. In order to overcome these difficulties, money was invented.

According to Crowther, “Money is one of the most fundamental of all man’s inventions. Every branch of knowledge has its fundamental discovery. In mechanics it is the wheel, in science fire, in politics the vote.

Similarly, in Economics, in the whole commercial side of man’s social existence, money is the essential invention of which all the rest is based”.

Money was an invention in the sense that “it needed the conscious reasoning power of man to make the step from simple barter to money-accounting”.

Money was first used as a unit of account or a numeraire in terms of which all other Ihings were to be measured and compared. The introduction of money as a unit of account was a simple but a significant invention.

It allowed the process of goods to be expressed in terms of a common unit of account; made the non- comparable goods comparable; and extended the scope of division of labour and specialisation.

But, even after the introduction of a common unit of account, trading was still a simple exchange of goods for goods. Only the prices were fixed in terms of one standard commodity (e.g., goat).

The use or money as a unit of account did not, however, remove all the difficulties of barter. There is still the difficulty of bringing the two parties together.

This difficulty was removed when the money, the unit of account, also became a medium of exchange. Corn was no longer exchanged for meat; it was sold for money (e.g., goat) and money was sold for meat.

The use of money as the medium of exchange saved time and effort and made multilateral trade possible. The third important use in which money was put was to act as a store of value.

With the invention of money, nothing except money was needed to be stored because money, being the general purchasing power, could purchase anything at any time.

In this way, the three functions, i.e., unit of account, medium of exchange and store of value, performed by a commodity (called money) together constitute the invention of money.

Development of Money

The origin of money is not known because of the non-availability of recorded information; it is deep-rooted in antiquity.

As Lord Keynes has put it, “Its origins are lost in the mists when the ice was melting, and may well stretch back into the paradisaic intervals in human history of the inter-glacial periods.

When the weather was delightful and the mind free to be fertile of new ideas in the islands of Hesperides of Atlantis or some Eden of Central Asia.”

No doubt, the evolution of money has been a secular process and shall continue to remain so, but the development of money in the present form can be historically traced as) it has 4321S&& different stages in accordance with the growth of human civilisation. These stages are discussed below:

1. Animal Money:

In primitive agricultural communities, domestic animals were used as money. Cattle were considered the common instrument of exchange. Different things were valued in terms of the number of cattle they can command in exchange.

In ancient India, according to Arth Veda, Go-Diam ^BSSSeeZZ was accepted as a form of money. Similarly, upto the 4th century B.C., cow and sheep were officially recognised forms of money to be used for collecting fines and taxes in the Roman State.

In Homeric poems (written in probably 9th century B.C.) the prices of commodities were expressed in terms of oxide.

2. Commodity Money:

In many countries, primitive money took the form of commodity money. A number of commodities like, bows, arrows, animal skins, shells, precious stones, rice, tea, etc., were used as money.

The selection of a commodity to serve as money depended upon different factors, like, the location of the community; climate of the region; cultural and economic development of the society etc.

For example, communities living by the sea shore chose shells or fish-hooks as money. In the cold ‘ Siberia, people adopted animal skins and furs as money. In the tropical regions of Africa, elephant tusks and tiger jaws were used as money.

Animal and commodity money had many serious disadvantages:

(a) It lacks uniformity and stand­ardisation; all cows and goats are not identical.

(b) Animals and commodities are an inefficient store of value; there is always a possibility of loss of value over a period of time; moreover, the cost of storing animal and commodity money is very high.

(c) Animals and commodities are not easily transferable because of difficulties of portability.

(d) There is the problem of indivisibility.

(e) The supply of animals and commodities may not be easily and quickly changed.

3. Metallic Money:

With the growth of society from pastoral to commercial stage, the composition of money also changed from animal and commodity money to metallic money. Gold and silver were the metals mostly used to form metallic money.

Due to their scarcity, usefulness and attractiveness, gold and silver were regarded as natural money. The use of metals as money ultimately led to the development of coinage system.

According to A.J. Toynbee, the coinage began in Lydia, a Greek City State around 700 B.C. The coinage continued till the 17th century.

Metallic money (uncoined metals and coins) overcame most of the diffculities of animal and commodity money. But, it had its own disadvantages:

(a) Quick transactions are not possible through coins.

(b) On account of its weight, large quantites of coins are not easily portable;

(c) Metallic money can be easily lost and stolen.

(d) Short-weighing and adulteration problems make the transaction costs of uncoined metallic money higher. Every time the quantity and quality of the metal is to be tested.

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