In this piece, you will read about
the origin of money: barter system
difficulties of barter system
division of labor
definition of money
the evolution of money
summary - evolution of money
In the early stages of human civilization, people sell goods and services in order to obtain other goods and services through direct exchange. In economics, this system is referred as Barter Economy. It is a simple economy where people produce goods either for self-consumption or for exchange with other goods which they want.
As a society becomes more civilized and the complexities of economic organization begin to multiply, exchange through barter tends to become more difficult and complicated.
The difficulties of barter system include:
Double coincidence of wants refers to the act of demanding to exchange a product-owned with another person who has a good you want and also wants what you own.
2. Lack of common measure of value
Even if you meet the person who has what you want and also want what you have, the problem arises as to the proportion in which the two goods should be exchanged. There being no common measure of value, the rate of exchange will be arbitrarily fixed according to the intensity of demand for each other's goods.
Certain goods are indivisible by nature like 'animals'.
4. Difficulty in storing value
This can be illustrated in three ways:
when trying to store perishable goods
the cost of storage
the lack of quick and easy exchange means for bulky goods.
Differed payments arise as credit sales are made. It is not the credit sales that causes a problem, but the repayment. Issues can arise on the following grounds:
the quality of the goods or service to be repaid
agreement on the specific commodity to be used for repayment
both parties would run the risk that the commodity to be repaid could increase or decrease seriously in value over the duration of the contract.
6. Lack of specialization
Specialization is the result of division of labor. Everyone produces what he or she is more effective and efficient. This is possible when he/she can sell it easily and can get at ease in the market what he/she needs. However, this is not easy in the barter system since you are required to have/produce a variety of things. As a result, people tried to do everything but master nothing. Ultimately, this reduces productivity in the overall economy.
"Historically, an increasing division of labour is associated with the growth of total output and trade, the rise of capitalism, and the increasing complexity of industrialised processes." ― Wikipedia
When the division of labor first began to take place, the butcher has more meat in his shop than he himself can consume, so as the brewer and the baker. But to manage the "double coincidence of wants", he is expected to have a certain quantity of someone's commodity or other, such as the ones he thinks that few people would likely to refuse in exchange for the produce of their industry.
Everywhere in the world where the beginnings of regular trade have appeared, some one of the articles of trade soon has come to be taken by many traders who did not expect to keep or use it themselves, but to pass it along in another trade. This made it money, for money is whatever comes to be used as a general price-good.
Definition of Money
Wealth Z @TheWealthZ
#wordoftheday ➛ MoneyMoney is anything generally accepted as a medium of exchange.#finance #business
6:52 AM ∙ Apr 23, 2022
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The evolution of money has passed through the following eight stages depending upon the progress of human civilization at different times and places.
1. Animal Money
Cattles are said to have been the common instrument of commerce in the primitive hunting stage.
The Armor of Diomede, says Homer, cost only nine oxen; but that of Glaucus cost of a hundred oxen.
2. Commodity 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 at the sea shore used shells and dried fish
People of the cold region used skins and furs of animals
African people used ivory and tiger jaws
3. Metallic Money
With the spread of civilization and trade relations by land and sea, metallic money took the place of commodity money.
4. Paper Money
Merchants were hesitant to use the above money types due to portability, safety, weight and related problems. Hence, they start to keep their metallic money with goldsmiths. The goldsmiths in return offers a written paper stating the amount of metallic money kept with him by the merchant whose name is written on it. The merchant, then, used this written paper as a means of payment for his purchase or can withdraw the commodity money any time he or she wants by returning the paper.
At the early age, paper money was emerged this way as "token money" - which is a representative paper money - convertible to gold. In the latter stage, this "token money" become "Fiat money" i.e., inconvertible legal tender.
5. Credit money
With the development of banking and credit activities, another form of convertible money developed in the form of money or bank money. This is referred as cheque system.
6. Near money
Near money items are financial assets that serve the store of value function of money temporarily and are convertible into a medium of exchange in a short time without loss in their face value. However, they do not have any legal status. Near money items fetch a fixed-rate of interest. Bonds, securities and debentures, bills of exchange, treasury bills, insurance policies and time deposits fall on this category. They possess moneyness or liquidity and they are money substitutes.
7. Plastic Money
This type of money aims at removing the need for carrying cash to make transactions i.e., credit cards and debit cards
8. Cryptocurrency
Cryptocurrency, a common term in recent years, is a decentralized and encrypted digital money.
It is monitored and organized by a peer-to-peer network called a blockchain, which also serves as a secure ledger of transactions, e.g., buying, selling, and transferring. Since the release of the first decentralized cryptocurrency (Bitcoin) in 2009, many other cryptocurrencies have been created.
Summary - Evolution of Money
“The Wealth of Nations” (1776) by Adam Smith
https://www.yourarticlelibrary.com/economics/money/5-stages-of-evolution-of-money/30311
Origins of Money and of Banking - https://projects.exeter.ac.uk/RDavies/arian/origins.html
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