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Stages In Development Of Money

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Mar 10th, 2011
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1. Evolution of Money
Throughout the history of civilization money has passed through different stages Historically the development of money in the present form has evolved through the following stages.

(i) Commodity money
(ii) Convertible paper money
(iii) Fiat money and
(iv) Deposit money.

These stages are discussed in brief below

1. Commodity Money
The earliest money which came into use and was accepted in exchange of goods for goods was commodity money A large number of items such as wheat cotton skins arrows bows camels goats etc have served as commodity money at different times and places depending upon the stage of development in that country As time passed on it was found that these commodities were not best suited as general means making payments.

The main problems with commodity money were that they lacked (a) durability (b) portability (c) divisibility into smaller units (d) uniformity and standardization (e) regularity in supply (f) and had high opportunity cost So search was made to find and more suitable and convenient mean which is c acceptable in payments for the goods and services sold The search led to the discovery of precious metals like copper, silver and gold.

Commodity money is the money that has a value apart from its use as money A large number of items has served as commodity money at different times and places In primitive agricultural stage domestic animals like cattle goats horses cows sheep rice grains etc were used as money As time passed on it was found that these commodities were not best suited as general means of making payments because there were difficulties in storing them They also lacked the essentials of durability transportability divisibility homogeneity etc So a search was made to find out a more economic means of making payments The search led to the discovery of precious metals of gold silver and copper.

2. Metallic Money
The next form of commodity money was the use of uncoined metals such as gold silver copper as medium of exchange Such coins had an intrinsic value (value in themselves) which was reflected in their face value The use of uncoined metals as a medium of exchange created further difficulties It became difficult for the people to know the weight and value of the piece of bullion at sight The discovery of mines of gold and silver and their exhaustion caused fluctuations in the supply of money Transportation and storage of precious metals also became dangerous Debasement of metal further caused inconvenience and complications in exchange Further advancement in the evolution of commodity money was the replacement of unstandardized metal ingots with a standardized coinage The metallic coins had a guaranteed weight of value by a competent authority They had also the intrinsic value and so commanded a universal respect With the passage of time these full bodied coins also proved a failure as a good medium of exchange Coins were clipped, abraded, and melted down. They were also debased. With the discovery or exhaustion of mines the intrinsic worth of the coins began to depart from their face value Transportation and storage of metals also became inconvenient and dangerous Efforts were then made to find out a better unit of account.

2 Convertible
Convertible paper money In the evolution of money the second stage was the discovery of convertible paper money as commodity money substitute The convertible paper money is paper money that may be redeemed for a specific commodity at a rate specified on the currency Before 1914 the bulk of bank notes were convertible into gold The bank notes of various denominations (f1 £10 £100) had a promise a by the bank to pay to the bearer a specific amount of gold on demand The practice of exchanging paper currency for gold was eliminated after 1914 in England and in 1933 in America In today’s economy the paper notes are inconvertible notes. They are neither fully nor fractionally convertible into gold. The statement written on bank notes I promise to pay the bearer on demand is worthless. This paper money developed into inconvertible money is called Fiat money.

3. Fiat Money
Fiat money consists of paper money that derives its status as money from the power of the state Fiat money is money because government says it is money It is not backed by promise to pay something of intrinsic value It is accepted because the government declares it a legal tender The creditors must accept it as a medium of exchange and as payments for debts.

4. Credit Money
Another most important component of money supply is the deposit money or credit money Deposit money consists of deposits at banks and the financial institutions which are subject to withdrawal by cheques. In developed countries of the world 95% of transactions are carried on with cheques. Cheques are a safe way of transferring the ownership of deposits in financial institutions They are normally acceptable as a medium of exchange.

5. Electronic Banking Stage
In all the developed and in many developing countries of the world including Pakistan the commercial banks have entered into an era of electronic banking The customers of banks having deposits in their accounts can make purchases pay bills transfer money simply by electronic signals
It may here be noted that currency deposits at banks and other financial institutions are money but cheques are not money A cheque is a transfer order enabling transfer of money Cheques are not legal tender and cannot be enforced in payments of debts So is the case with plastic credit cards The customer can make purchases by credit card up to his credit limit The credit card in itself is not money because it is not legal tender for making payment Your card is not a unit of account a store of value or a standard of deferred payment.

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