Origin of money and its concepts

                              

In traditional societies, not the actual money but its proxy was used in all transactions. There were many forms of money, commodity money, credit money as well as representative money. Let’s understand the concepts below.

Commodity money:

In ancient age old times, barter system existed in societies. People exchanged commodities for commodities through a common agreement between two parties. The net gain from sharing of commodities was assumed to be equal.Such transactions were practiced for a long time in developing countries but there were a no of limitations.

Some commodities weren’t perfectly divisible.

There was lack of a common value in multi commodities trade. It was difficult to determine value of one commodity when exchange for
another.

Perishable commodities couldn’t be exchanged or substituted for other commodities.

Due to these limitations, commodity money usage declined and almost disappeared.

Representative money

After decline of commodity money, there came a phase, when representative money came into existence. Representative money is any type of money that has face value greater than its value as a material, such as precious stones, and metals like gold and silver. Such representative money was used in commodity transactions. Mostly, representative money was overvalued while the other commodities were undervalued. Also, they were limited availability of quantity of representative money and couldn’t be used for common transactions.

Credit money

Most of the commodities were exchanged based on credit basis. Other assets such as land, houses, factories were used in exchange of commodities. But such commodities were not liquid and available for masses. Therefore, credit money had severe limitations as well. In order to overcome all limitations of commodity, money is used as a medium of exchange. Now, today, almost all transactions take place in terms of money.

Money and its definition

Money is defined as any object that is accepted as a method of payment for goods and services. It’s a medium of exchange. Money is defined as store of value.

Characteristics of money are as follows

·        Acceptability-money is universally acceptable. The coins are supplied by the government. The currency notes are supplied by the reserve bank. Therefore, money is acceptable to people despite its unique shape, size and colour for every country.

·        Durability-money is durable and cannot be easily destroyed. Even though its exchanged and circulated in the economy, money remains durable and usable for long periods of time.

·        Divisibility- Money is perfectly divisible. It can be easily converted into different forms of notes. A five hundred rupee note can be easily exchanged for fifty ten rupee notes. Such divisibility facilitates commerce and trade. Its an important feature of money.

·        Uniformity- money is uniform, it is has consistent shape, colour and size.

·        Recognizability- people can recognize and identify money and use it when needed.

·        Scarcity- money is scarce and not easily available. In order to get money, a person has to take on a debt, borrow or work for it.

·        Stability-Money provides stability for individuals as well as economies.