The Evolution of Money

Module 2 THE EVOLUTION OF MONEY The stock of trade of the bank is money, hence, it is expedient to examine the origin of money, evolution of money, or the evolution of the payments system; as well as to consider its form, importance, characteristics and functions. As a recap, money is anything that is generally acceptable in payment for goods and services or in the repayment of debts. We can obtain a better picture of the functions of money and the forms it has taken overtime by looking at the evolution of the payment system, the method of conducting transactions in the economy. The payments system has been evolving over centuries, and with it the form of money. At one point, precious metals such as gold and silver were used as the principal means of payment and were the main form of money. Later, paper assets such as cheques and currency began to be used in the payments system and viewed as money. Where the payments system is heading has an important bearing on how money will be defined in the future. The present system of money was arrived at in three distinct stages, namely: 1. The Direct Production Stage, 2. Indirect Production using the barter system, and 3. Indirect Production using money as a medium of exchange. Direct Production This refers to a situation whereby the same person makes all the goods and services needed by him single-handedly without any help from another person. This was possible in the Stone Age*(which existed between 2.5 million years ago – 2400BC) when a household was completely independent of other households. During this period, man was self-sufficient in production (such as in subsistence farming). Thus, he made all the goods and services which he required with the members of his family. Man did not specialize in producing a particular good which he had the best advantage over others. Indirect Production using the Barter System From available record, trade by barter first existed in Mesopotamia around 6000BC. This is a situation where a man produces goods and services in excess of what he and his household need and sells the surplus to other people. In the Stone Age, it was possible for man to produce everything needed by him and his household. However, as time went on, man’s needs and wants increased, hence, he could not produce all his needs and that of his family entirely by himself. Therefore, to satisfy his multifarious needs, he needed to depend on others. To do this, he began to produce a large quantity and to exchange the surplus against the surplus of other people. For example, a farmer that produces a large quantity of maize than his household required, but could not produce the cutlass which he needed had to exchange his surplus maize with the blacksmith who needed maize and was ready to exchange his cutlass with maize. This process of exchange of goods for goods is known as Trade by barter. *Stone Age = early historical period: the earliest period of human history, in which tools and weapons were made of stone rather than metal. It is divided into the Paleolithic, Mesolithic, and Neolithic periods. It extends from around 2.5 million years ago to around 2400 BC. 1 However, the problems associated with trade by barter are many and varied. i. Double coincidence of want ii. Problem of divisibility iii. Exchange rate problem iv. Time wastage v. Difficulty in giving change vi. Inconvenience in borrowing and lending vii. Problem of accounting viii. Non-feasibility of future contracts Indirect production using money as a medium of exchange As a result of dependence on others for goods and services which man cannot produce himself, there evolved a process of specialization whereby one continues to produce a specific good or service which he can produce best, and becomes a specialist on the job by so doing. This came into being as a result of over-dependence on one another. Unlike in barter trade, money is used as a medium of exchange because he is sure of exchanging his surplus goods with money, an entrepreneur continues to produce such goods in large quantities and therefore become an expert. Coupled with this is the fact that the money received by him is generally accepted by people for settlement of debts. This stage is the present stage of monetary development in the world. TYPES OF MONEY Like in other parts of the world, several forms of commodities have served as money in Africa and Nigeria before the modern money was invented. Examples of these commodities include cattle, tobacco, cowrie shells, beads, textiles, iron-hoe blade, salt bar, kissy penny, tea, manilas and slaves amongst others. In the European countries, precious metals like gold and silver have also been used as a medium of exchange. All the aforementioned types of money have been identified as customary money, legal tender money, commodity money, token money, pure money and quasi-money. In a nutshell, they are all grouped into four including the following; metallic or commodity money, paper or fiat money, credit money, quasi or near money. 1. Commodity Money or Metallic Money This comprises of money made of metal. In the olden days, gold and silver served as money. But due to their scarcity coupled with their value which was considered precious, other metals like copper, brass, nickel, aluminum and bronze whose values were less than that of gold and silver were also used as money. Therefore, any object that clearly has value is a likely candidate to serve as money, and a natural choice is a precious metal such as gold or silver. Money made up of precious metals or another valuable commodity is called commodity money or metallic money, and from ancient times until several hundred years ago, commodity money functioned as the medium of exchange in all but the most primitive societies. The problem with a payments system based exclusively on precious metals is that such a form of money is very heavy and is hard to transport from one place to another. Thereafter, metallic money was made up of coins which may either be a standard coin or a token coin. Standard 2 coins are those coins whose face value is equal to their intrinsic value, while token coins are those coins which have their face value higher than their real and intrinsic values. 2. Fiat Money or paper Money The next development in the payments system was paper currency (pieces of paper that function as a medium of exchange). Thus, another name given to paper money is fiat money. This means money by command. It is so called by this name because it is backed by or enforced by law. Thus, it is a legal tender. Initially, paper currency carried a guarantee that it was convertible into coins or into a fixed quantity of precious metal. However, currency has evolved into fiat money, paper currency decreed by governments as legal tender (meaning that legally it must be accepted as payment for debts) but not convertible into coins or precious metal. Paper currency has the advantage of being much lighter than coins or precious metal, but it can be accepted as a medium of exchange only if there is some trust in the authorities who issue it and if printing has reached a sufficiently advanced stage that counterfeiting is extremely difficult. Because paper currency has evolved into a legal arrangement, countries can change the currency that they use at will. Indeed, this is what many European countries did when they abandoned their currencies for the euro in 2002. Major drawbacks of paper currency and coins are that they are easily stolen and can be expensive to transport in large amounts because of their bulk. To combat this problem, another step in the evolution of the payments system occurred with the development of modern banking: the invention of cheques. 3. Credit Money or Cheques This consists of negotiable instruments like cheques and drafts among others. They are not regarded as legal tender unlike coins and notes because they are not generally accepted by people as a medium of exchange and people cannot be compelled to accept them. Hence, they are regarded as optional money. A cheque is an instruction from someone to his bank to transfer money from his account to someone else’s account when she deposits the cheque. Cheques allow transactions to take place without the need to carry around large amounts of currency. The introduction of cheques was a major innovation that improved the efficiency of payments system. Frequently, payments made back and forth cancel each other; without cheques, this would involve the movement of a lot of currency. With cheques, payments that cancel each other can be settled by cancelling the cheques, and no currency need be moved. The use of cheques thus reduces the transportation costs associated with the payments system and improves economic efficiency. Another advantage of cheques is that they can be written for any amount up to the balance in the account, making transactions for large amounts much easier. Cheques are also advantageous in that loss from theft is greatly reduced, and because they provide convenient receipts for purchases. There are, however, two problems with a payments system based on cheques. First, it takes time to get cheques from one place to another, a particularly serious problem is you are paying someone in a different location who needs to be paid quickly. In addition, if you have a current account, you know that it usually takes several business days before a bank will allow you to make use of the funds from a cheque you have deposited.

Load more