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The Story of Currency (A Brief Journey Through the History and Evolution of Money)

Updated on January 30, 2014
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What is Money?

"Money is the root of all evil" ?

Maybe. But this is only because the people that use money are 'evil'. Money itself is harmless and can be used to do many good deeds. Either way if I were to give 'money' a definition it would go something like this;

"Money is a medium of exchange"

Hold on! Where's notes and coins in this definition?

Well, notes and coins do not necessarily constitute all forms of money or currency known to man. Money happens whenever anything (any object) serves the purpose of a medium of exchange.


What is a Medium of Exchange?

Fair question. An exchange is a transfer of ownership of something. It could be anything. A car, book, mobile phone, food etc. So say we pay $20 for some food item, that $20 just became a medium of exchange. Say we paid a bunch of pebbles to buy the same food, guess what, those pebbles just became a medium of exchange.

So in short, anything that facilitates a transfer of ownership of product/s between two or more parties is a medium of exchange and hence is known as 'money'.

Timeline of Evolution of Money
Timeline of Evolution of Money | Source
Barter System made simple
Barter System made simple | Source

Comic Understanding of Barter System

What was before 'Money'?

So if 'money' coordinated everything and anything and everything could be considered as money (due to medium of exchange concept), what was before money?

Before 'mediums of exchanges' came into being, there was a whole other system in place called the 'Barter System'.


The Barter System

This is a system where good were exchanged for other goods. There was no medium of exchange in this era. Simply a mere exchange of goods between two or more parties.

A farmer who has excess corn would give some corn to a fisherman and buy some fish. That's all about the Barter System. This era dates back to God-knows-how-long years.

Even before the Barter System people used to create what they wanted. Those were much much simpler times. If a person didn't have something, he didn't pursue it. He was just satisfied with what he had.

Problem of Divisibility
Problem of Divisibility

Drawbacks of the Barter System

The Barter System was a simple, convenient system. But it had many drawbacks. Drawbacks that lead to the abandonment of the Barter System altogether.

  • No double coincidence of wants - This is one of the main drawbacks of the Barter System. This means that people's wants always didn't match. Let's take the above example itself. Assume the corn farmer wants to exchange his excess stock of corn for some fish. But what if the fisherman doesn't want corn? Or he already has corn from another farmer? Or he just doesn't like corn? This meant a clash of wills between two parties and this happened a LOT more than you would think. People's needs and wants did not match every time. Assume a potter exchanges some pottery for some corn. And next month the potter comes to exchange again. Although the corn has been eaten away the pottery still lasts. So the farmer would not need any more pottery. And again a clash occurs.
  • No specific unit of value - How much of corn would be a fair exchange for one piece of pottery? Nobody knew. How many eggs was a fair trade for a cow? Nobody knew. No dollars were invented back then.
  • No specific unit of measurement - Again something similar to the above problem, but this time it's about measuring the quantities of goods to be exchanged. No Kilograms were invented back then.
  • Inability of divisibility of goods - This was again a huge problem in the Barter System. Say a Poultry farmer wants to exchange two chicken with a horse merchant. First of all they didn't know how many chickens were worth a horse. Secondly the poultry farmer is only willing to exchange two chicken. There's no way that he would get a horse for two chicken and there was no way of dividing the horse either. Even vice versa the situation is irrecoverable. There was no way to pay for some exchanges without having smaller units of mediums of exchanges.
  • Inability to transport goods - Somethings were just not meant to be transported. A poultry farmer could not carry his chicken on his shoulder until he met a suitable buyer matching his exact exchange needs. When it comes to perishable goods it was worse.

All these issues lead to the downfall of the Barter System, which is also considered the first stage of the evolution of money. Some exclude Barter era from the evolution stages of money simply for the fact that there was no money involved in this stage. But downfall of the Barter System is the reason for the evolution into he first real stage of evolution of money as we know it.

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Different types of Commodity Money
Different types of Commodity Money | Source

Stages of Evolution of Money

1) Commodity Money

This is considered the first stage of the evolution of money. In this stage certain types of commodities were used as a medium of exchange. Don't confuse this with the Barter System though.

In this stage people defined a certain specific commodity to be used as a medium of exchange. They did not simply exchange what they have, as in Barter System. They 'bought' what they wanted using these specific commodities.

Some of these commodities used in this era were salt, sea shells, pebbles, salt, cocoa seeds, tobacco, feathers, grains and many more.

Later on people found out places to get plenty of these commodities and then these commodities became available in abundance and lead to the fall of the commodity money system.


Ancient Metallic Money
Ancient Metallic Money | Source

2) Metallic Money

The downfall of Commodity money era lead to the next stage of evolution known as the Metallic money. In this era people emphasized on the fact that 'money' should be hard to come by.

So initially people started using pieces of Gold and Silver (mainly) and other metals as a medium of exchange.

Later on they developed hooks, circular pieces etc from these metals and used them as money assigning them values based on the approximate content of Gold or Silver. This made the transactions fast and easy.

3) Paper Money

Carrying Gold and Silver around was a dangerous activity. Since people realized it's value the 'evils' begin to emerge.

As a solution the first ever banking systems came in to place. This, however, is unlike any banks of today. In this era the bankers were the goldsmiths.

People owning Gold or Silver began to leave them at a Goldsmith and take a written note certifying to the value of the metals he has placed in Goldsmith's custody. So the owner could use this written note as a certification of the value he owns and make purchases with it.

These Goldsmiths later on initiated the banking function that still exists to date.

4) Notes and Coins

This is the present era of evolution of money. Notes and coins dominate the mediums of exchange today.

The real value (intrinsic value) (value to create a note or a coin) is less than the extrinsic value (value mentioned on the face of the note or coin) to stop the abuse of the monetary system.

The first real use of coins dates back to 500 - 700 BC in India and China.

5) Electronic Money

This is the present and the future of money. Even today credit cards, debit cards and all those plastic cards are replacing the need to use notes and coins.

One of the main reasons for this shift is the increased security and portability these plastic cards provide over the standard notes and coins.

In the future notes and coins will cease to exist and we would only need a plastic card or even the touch of our finger tip to transfer billions of dollars from one person to another within a matter of seconds.

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    • Nimesh De Silva profile image
      Author

      Nimesh De Silva 2 years ago

      @Raimer Gel

      Perhaps. But if money wasn't invented we'd still be fighting over how to divide a cow to pay for a kilo of rice. :P

    • profile image

      Raimer Gel 2 years ago

      Perhaps, money could be the worst invention of mankind. It quantified personal happiness into currencies and bank accounts.

    • Nimesh De Silva profile image
      Author

      Nimesh De Silva 3 years ago

      @TurtleDog

      Thanks. Means a lot coming from a prominent hubber like yourself.

    • TurtleDog profile image

      TurtleDog 3 years ago

      Thanks for the lesson. Voted up. Great, great job breaking down the barter system and the drawbacks by the way