The form, we know as money, has reached through different evolutionary periods. According to professor Crowther following are the stages of evolution of money:
- From Barter System to Commodity money
- From Commodity money to Metallic money
- From Metallic money to Paper money
- From Paper money to Credit money
Humans living in caves were so independent and uncivilized, their needs were very limited. However with the passage of time when humans started living in tribes; they became civilized and their needs and dependence on each other started increasing. Dependence on each other initiated the need to exchange goods and services between themselves to get something what they want. In this way they started to fulfill each other’s needs by exchange of goods or services. This is called as Barter system.
Difficulties in Barter System:
The sake of getting better and better for humans never ends. So, they start facing few problems in barter system. These problems as discussed below were the reasons for the invention of money.
Lack of Double Coincidence of Wants:
Barter trade was only possible when both the persons mutually want the good of their counterpart. And it was very rare to face such a coincidence. This has been the major problem in the barter system.
Problem in Transportation:
In barter system mobility of goods from one place to another was very difficult and expensive. Since wealth consisted of cattle, houses, fruits and vegetables etc. there were many difficulties to transfer them from one place to another.
Lack of Common Measures:
To exchange goods and services with other goods and services there was no measuring yard to measure the worth of such goods and services. That’s why valuation of the commodities was very difficult.
Lack of Store of Value:
One of the most crucial problems in barter system was lack of store of values. Goods were perishable and cannot be stored for long time therefore they must be consumed as quickly as possible. Such goods cannot be saved for future use.
Problem in Divisibility:
In barter system sometime it was impossible to divide the goods and services to exchange with other goods and services. For example: It was not possible for a farmer to purchase 1kg sugar in exchange of one cow.
Difficulties in Payments of Services:
Services are also needed to get satisfied but in barter system it was very difficult to pay as a reward of getting any service. For example: If a lady teacher is teaching the son of a barber, it was very difficult to pay her for her services because she does not need a haircut in exchange.
Evolution of Money:
Facing the problems in barter system people started thinking of a common mean that can be used as money which will be acceptable by everyone and has the capability of measuring yard. Following are the phases in which money has been invented:
Stage 1. Goods as Money:
While facing the problems in barter system different goods were used to serve the purpose of money such as animals, arrows, slaves and pearls etc. There was a time when Virginia tobacco was also used as money but they were not such affective as they were expected to be. So, these things were given up to be used as money and search for a thing which can serve as good money continued.
Stage 2. Metal as Money:
In beginning precious pieces of metals such as gold and silver were used as money and they were approximately successful to serve the purpose of good money hence coin age was initiated. Unending quest of getting better and better changed these metals from gold and silver into different other metals such as copper, zinc and nickel etc.
Stage 3. Paper Money:
The problems, such as shortage of precious metals, transfer / mobility problems, heavy weight etc. lead humankind towards usage of paper for serving the purpose of money. China is the first state where paper was used as money. In this way paper was also used among coins as money. Now a day’s paper money (currency notes / cash) is issued by the central bank of every country and special kind of paper is used to reduce the danger of being copied illegally.
Stage 4. Credit Money:
In modern times, credit money has been invented to reduce the use of cash. Credit money is circulating on the basis of trust. Even if you have no money, you can purchase commodities with the help of credit card, a facility that enables you to purchase the goods for now and pay cash back to your bank in future.