MACROECONOMICS

EVOLUTION OF MONEY

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MA’AM KHUDIJA
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MEHREEN
MEHBOOB
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EVOLUTION OF MONEY

The figure shows evolution of money throughout time

BARTER SYSTEM:

In the early days of history when money was not known to people, people did not use coins and
notes for the purchase and sale of goods and services. They exchanged goods with goods. This system
of exchanging goods is known as barter system.

“Barter means direct exchange of goods with another when money was not a medium of
exchange”.

For example:

A milkman used to purchase everything in exchange of milk.

DIFFICULTIES OF BARTER SYSTEM:

 Lack of double coincidence of wants

 Lack of common measure of value
 Lack of store of value
 Indivisibility of goods
 Lack of deferred payments
 Difficulty in transfer of wealth

EVOLUTION OF MONEY:

In our world today, money is high-tech. People not only use coins and dollar bills issued by the
government as money, but also increasingly cheques and credit cards. Banks are able to move
millions of dollars by touching only one button on their computers. The first known form
of currency emerged nearly 5,000 years ago. The earliest known mints date to 650 and 600 B.C.
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Owing to above mentioned drawbacks of barter system, man has started his efforts to discover a
medium of exchange (money), which can overcome the difficulties of barter system. So, passing
through the various stages, we have a fine shape of money.

These stages are as follows:

COMMODITY MONEY:

The first type of money we started to use was probably commodity money. Commodity money
is a medium of exchange that has value in and of itself, as well as its value in money.

For example:

Examples of commodities that have been used as media of exchange include gold, silver, copper, salt,
peppercorns, tea, decorated belts, shells, alcohol, cigarettes, silk, candy, nails, cocoa beans, cowries
and barley.

This money prevailed 2000 years ago. The value of all units of commodity money was not equal. It
was also difficult to store some of the commodities. Because of these drawbacks the use of
commodity money was given up in 19th century.

METALLIC MONEY:

Because of drawbacks of commodity money, man started efforts to discover better money and finally
gold and silver were selected for this purpose Coins of gold and silver were used as a medium of
exchange. This innovation in money was instrumental in allowing the economy to grow further. But
this system also had some drawbacks.

For example:

Silver got dirty and darkened with the passage of time and the quantity of gold is scarce and value is
very high and it was not possible to make its coins for buying products.

PAPER MONEY:

When it was felt that it is very difficult to carry metal coins from one place to other, paper money took
its place. Paper had several benefits over coins. There was no longer a need to carry around heavy
loads of coins and larger transactions became easier. Storage and transfer of wealth was also
improved as the notes required less space. It is speculated that this innovation also helped the growth
of the economy the Americas as it was easier to transfer money across the Atlantic Ocean. Paper
money is issued by government. All currency notes are issued by the state bank of Pakistan by the
permission of government. In present age, paper money is used in all parts of the world and it is
legally accepted.

For example:

Currency notes are easy to transfer from place to place.

CREDIT MONEY:
With the expansion of economies in modern age, credit money is used to run business affairs. This
money is used in the form of cheques issued in the name of banks. Bills of exchange and credit cards
are also form of credit money. Payments and receipts of heavy amounts in business sector are made in
credit money. Carrying around large sums of money became unnecessary and we could now conduct
large and small transactions without having to worry about cash. In addition, the credit card added

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never before seen functionality into money. Critically, it opened the possibility of remote payments.
This would have a tremendous effect on our economy, especially coupled with the advent of the
internet.
For example:
Credit/Debit cards are durable means for the transactions of large sums of money.
CRYPTOCURRENCIES:
The genesis block of the bitcoin blockchain was mined in 2009. This pivotal moment marked the
beginning of not only a new type money but also an entirely new asset class. Bitcoin was able to solve
the central problem of double spending, and showed how we could have digital money that really was
scarce. Fast forward to today and we have had an explosion in the amounts of available
cryptocurrencies.
For example:
Ethereum is an example of a cryptocurrency platform built to run smart contracts.
Conclusion:
If we view the development of money alongside total global economic growth, we see that as our
economy grew, new types of money were introduced to help fuel the exponential growth. Due to
many innovations and technological advances in the computer industry, money has become finally
what it is today: high-tech. It acts like a symbol of the commercial structure we operate in. By
examining the history of money, it becomes obvious that a higher number of societies with
sophisticated economies has resulted in money adapting to the technological advances in the
economies.