Money: Introduction to the evolution of Money
3 months ago
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.
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.
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.
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 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.