Stages of Evolution of Money
Some of the major stages through which money has evolved are as follows:
- Commodity Money
- Metallic Money
- Paper Money
- Credit Money
- Plastic Money.
Money has evolved through different stages according to the time, place and circumstances.
(1) 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 furs, skins, salt, rice, wheat, utensils, weapons etc. were commonly used as money. Such exchange of goods for goods was known as ‘Barter Exchange’.
(2) Metallic Money:
With progress of human civilization, 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. It was the main form of money throughout the major portion of recorded history.
(3) 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. Paper money is regulated and controlled by Central bank of the country (RBI in India). At present, a very large part of money consists mainly of currency notes or paper money issued by the central bank.
(4) Credit 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.
(5) Plastic Money:
The latest type of money is plastic money in the form of Credit cards and Debit cards. They aim at removing the need for carrying cash to make transactions.
The development of money has passed through various stages in accordance with time, place and circumstances with the progress of economic civilsation of mankind.
Economists have recognized five such stages in the evolution of money:
I. Animal Money
II. Commodity Money
III. Metallic Money
IV. Paper Money
V. Credit Money
I. Animal Money:
Animals were being used as a common medium of exchange in the primitive hunting stage. History records that cattle occupied a place of pride as money in the earliest period of human civilization.
In temperate regions of Europe, Asia and Africa cattle was regarded as the most standard unit of barter for quite a long time in the primitive era.
In the ancient Indian civilization, the concept of Go-Dhan (cattle wealth) as a form of money is also referred to in Arth-Veda. In the fourth century B.C., the Roman State had officially recognized cows and sheep as money to collect fines and taxes.
II. Commodity Money:
In certain communities, early primitive money, in its crudest sense, also took the form of commodity money. A large number of commodities from axes to yarn have been adopted as money.
The particular commodity chosen to serve as money depended upon various factors like location of the community, climatic environment of the ‘region, cultural and economic standard of society, etc.
For example, people living by the seashore adopted shells and dried fish as money. People of the cold regions in Alaska and Siberia preferred skins and furs as a medium of exchange.
African people used ivory and tiger jaws as money. Besides, commodities such as precious stones, rice, tea, tobacco, etc. also served as money during the primitive days of human civilization. Professor Paul Einzig has recorded some 17 commodities in the list of primitive money.
Animal and commodity money, however, suffered from such drawbacks as:
- Lack of uniformity and standardization;
- Inefficient store of value due to the problem of storing and loss of value with the lapse of time;
- Lack of easy transferability due to difficulties of portability; and
- Indivisibility.
III. Metallic Money:
Commodity money gradually transformed into metallic money when precious metals like gold, silver, copper, bronze, etc. were discovered and used as a medium of exchange with the growth of economic civilization from the pastoral to the commercial stage of society.
Use of metals as money in the course of time paved the way for the development of coinage system in the economy.
As historian Toynbee narrates, the coin age began around 700 B.C. in Lylia, a Greek city state. Imperfections of the metallic money in size, shape and weight, etc. have been removed with the minting of coins by states.
Metallic money had, however, the following drawbacks:
- On account of its bulkiness, a large sum of money in terms of coins was not easily portable.
- It was unsafe to carry and could be easily lost or stolen.
- Rapid transactions were not feasible by using coins as a mode of payment.
- The coin era, however, lasted till the 17th century.
IV. Paper Money:
In the 17th and 18th centuries, paper currency emerged as “token money.” In modern era, paper money has become popular. It originally came as paper receipts against metallic money which was found unsafe to carry by itinerant merchants.
Then with the shortage of metals, state authorities thought of introducing paper currency a representative paper money which was convertible.
In the later stages, however, it became “fiat money”, i.e., inconvertible legal tender. Being representative money, paper currencies, thus, economies the use of standard coins or metals.
V. Bank Money:
In the final stage, along with paper money, another form of convertible money developed in the form of credit money or bank money, owing to the growth of banking institutions and credit creation activities and cheque system of payments in modern era.
In modern commerce large transactions are carried on through cheques and only small transactions are managed through currency money.
In modern economy, coins, paper notes and bank money, i.e., cheques issued against demand deposit, all serve as money. But even today, sometimes other things have also served as money.
In Germany, for example, in the post-war period (1945-46), cigarettes and cognac were used as money when its financial and economic condition had greatly deteriorated.
Sometime ago, due to shortage of token coins in India, coupons and stamps were used as money.
In short, anything and everything can serve and has served as money provided it is generally recognized and accepted as means of payment. But all things cannot serve as good money.
Good money should possess the attributes of general acceptability, recognisability, portability, divisibility, malleability, durability, uniformity, adequacy and stability of value.