Unit 9: The evolution of Money

1. What is money?

Money is any object that is generally accepted as payment for goods and services
and repayment of debts in a given country or socio-economic context.

2. The function of money

Money serves three basic functions.

a. Medium of exchange

The exchange of goods and services in markets is among the most universal
activities of human life. To facilitate these exchanges, people settle on something
that will serve as a medium of exchange—they select something to be money.

The object chosen to become money

+) Must be easily standardized

+) Must be widely accepted

+) Must be divisible

+) Must be easy to carry

+) Must not deteriorate quickly

b. Unit of account

A unit of account is a standard monetary unit of measurement of value/cost of

goods, services, or assets. Money must serve as a way to price or measure goods
and services that people want to buy. We use money in this fashion because it is
also a medium of exchange. When we report the value of a good or service in units
of money, we are reporting what another person is likely to have to pay to obtain
that good or service.

c. Store of value

Money has to hold its value for a definitive period of time, which is what makes it
possible for it to be a medium of exchange. This means that you must be able to
store it and use it at a later time, in other words, it holds its value over time. This is
much different than bartered or traded goods, which may have an expiration date
or might depreciate in value.

Consider a $20 bill that you accidentally left in a coat pocket a year ago. When you
find it, you will be pleased. That is because you know the bill still has value. Value
has, in effect, been “stored” in that little piece of paper.

3. The evolution of money

3.1. Bartering

It is the oldest form of commerce. The history of bartering dates all the way back
to 6000 BC.

Definition: It is the form that people exchanged services and goods for other
services and goods in return. Goods were exchanged for food, tea, weapons, and
spices.

Ex: - A farmer may exchange a bushel of wheat for a pair of shoes from a
shoemaker.
 - A carpenter who builds a fence for a farmer. Instead of the farmer paying the
builder $1,000 in cash for labor and materials, the farmer could instead
recompense the carpenter with $1,000 worth of crops or foodstuffs.

3.2. Metallic money (Gold and silver)

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.

The earliest coins were made of electrum, a natural mixture of gold and silver, and
were crude, bean-shaped ingots bearing a primitive punch mark certifying to either
weight or fineness or both.

3.3. Paper money

Experience had shown that carrying large quantities of gold, silver, or other metals
proved inconvenient and risked loss or theft. The first use of paper money occurred
in China more than 1,000 years ago as a means of reducing the need to carry heavy
and cumbersome strings of metallic coins to conduct transactions.

Paper money is a country's official, paper currency that is circulated for the
transactions involved in acquiring goods and services.

Ex: + More than 350 million people around the world use the dollar as their main
form of currency—and more than $17 trillion of economic activity is accounted for
with U.S. paper money.
 + The Euro is another form of paper money that is used in multiple countries.
As of 2020, 19 of the 27 member states in the European Union (EU) use the euro
as their official currency

3.4. Bank money (Credit money)

Credit money is the creation of monetary value through the establishment of future
claims, obligations, or debts.

Considered as something that is not immediately repayable, a promise of future

payment

Examples: credit cards, banknotes, IOUs, ...

4. Conclusion

Money is anything that is generally considered acceptable as a means of payment

in the settlement of all transactions, including debt. At different times and places,
various things such as shells, goats, cows, rice, silver and gold pieces and coins,
paper currency notes, and demand deposits of banks have served as money. The
main functions of money are distinguished as a medium of exchange; a unit of
account; a store of value.

Money allows people to trade goods and services indirectly, it helps communicate
the price of goods (prices written in dollar and cents correspond to a numerical
amount in your possession, i.e. in your pocket, purse, or wallet), and it provides
individuals with a way to store their wealth in the long-term.

Money is the most important invention of modern times. It has undergone a long
process of historical evolution. Briefly, the evolution of money was mainly through
commodity money, metallic money, paper money, and bank money.
QUESTION

1. Which of the following statements is true about the characteristics of the gold
table system?
a) The State does not restrict the minting of gold coins.
b) Paper money is freely convertible into gold in unlimited quantities.
c) The second fairy and the gold fairy can be circulated without restriction
d) All three options above
2. What function of money is considered important by modern economists best:
a) Means of exchange
b) Means of measurement and expression of value
c) Means of saving value
d) Means of international payment
e) None of the above
3.Which of the functions of money makes money different from other goods:
a) Means of storing value
b) Measure of value
c) Means of payment of debt
d) Means of exchange
4.When prices in currency are used to compare values, what function is the
currency performing:
a) Unit of measurement of value
b) Means of exchange
c) Means of storing value
d) Measure of payment system
5. Because money functions as a store of value, it:
a) No profit is earned.
b) Cannot be a durable asset.
c) Must be cash.
d) As a way to save for future purchases.