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There are different stages in the evolution of Money. This evolution have been categorized into different stages as expounded here.
As explained earlier under the barter system and evolution of money, various types of commodities have been used as money from the beginning of human civilization.
The evolution of money started off with the commodity era of exchange.
Stones, spears, skins, axes, bows and arrows, etc were used as money in the human society at one time or the other.
The pastoral society used cattle as money while the romans used cattle and salt as money at different epoch.
The Mongolians used squirrel skins as money while precious stones, tea, shells, fishhooks etc have also been used as a means of exchange.
The use of commodities as money has the below listed problems:
- The commodities were not uniform in quality, such as cattle, grains, shells, skins, etc. therefore, there was lack of standardization which made pricing difficult.
- Difficulty to store and prevent loss of value in the event of perishable goods.
- Supplies of such commodities were uncertain.
- They lacked in portability and hence difficult to transfer from one location to another.
- There was huge problem of indivisibility e.g livestocks.
The evolution of money also includes the metallic age.
Metallic money took the place of commodity because it was a more convenient thing to accept, weigh, divide and assess in terms of quality.
Metals were made into coins of predetermined weight. This was an evolution of money as at that time.
This innovation was attributed to King Midas of Lydia (560-546 BC). The first coins were made of metals, alloy of gold and silver.
But some ingenious persons started debasing the coins by clipping a thin slice off the edge of coins.
This led to the hoarding of full-bodied coins which the result that debased coins were found in circulation. This led to the minting of coins with a rough edge.
As the price of gold began to rise, gold coins were melted in order to earn more by selling them as metal.
This led governments to mix copper or silver in gold coins so that their intrinsic value might be more than their face value.
As gold became dearer and scarce, silver coins were used, first in their pure form and later on mixed with alloy or other metals.
Metallic money had the following defects.
- The debasement of gold and silver coins by counterfeiters was one of the problems encounter in the evolution of money and the early carriage era.
- It was not possible to change its supply according to the requirements of the nation both for internal and external use. This was a slap in the evolution of money.
- It was unsafe and inconvenient to carry precious metals for trade purposes over long distances.
- Being heavy, it was not possible to carry large sum of money in the form of coins one place to another.
- During this evolution of money, minting and exchanges was very expensive.
The origin of paper money has been traced to the receipts issued by goldsmiths for gold deposited with them for safe keeping.
As goldsmiths were thought to be honest merchants, people started keeping their gold with them for safe custody.
In return the goldsmiths gave the depositors a receipt promising to return the gold on demand.
This receipts of the goldsmiths were given to the sellers of commodities by the buyers. This receipts were substituted for money.
Such paper money was backed by gold and was convertible on demand into gold. This led to the evolution of money and development of bank notes.
Towards the end of the eighteenth century, the bank of England suspended the convertibility into gold of the Bank of England notes as a precautionary measure against the outflux of gold from England.
The bank of England notes were made inconvertible with the discontinuation of the gold standard in 1798.
Another stage in the evolution of money in the modern world is the use of credit money.
This is inform of demand deposits which is a money with-drawable by a holder of the deposit through a draft or cheques.
But a cheques or draft is not legal tender and may not be accepted as a means of payment or medium of exchange. Thus, it is demand deposit which is credit money.
The next stage in the evolution of money has been the use of deposit bills, treasury bills, bonds, debentures, savings certificates, etc.
They are known as ‘near money’ because they are close substitutes for money and for them to become money, they must be converted into cash or demand deposit without any loss.
This is the current phase in the evolution of money. Crypto currencies are the next evolution of money as it relates the jet age.
Cryptocurrencies like Bitcoins has been widely accepted as a virtual asset and money and performs the medium of exchange functions with an online wallet.
They are almost perfect substitutes for money as a store of value.