Question

Explain the different stages of growth of money.

Answer 1

1. Commodity money: In many parts of the world, early forms of money were based on commodities. Items such as bows, arrows, animal hides, shells, precious stones, rice, and tea commonly functioned as mediums of exchange. The choice of which commodity to use as money varied depending on several factors, including the community’s geographic location, regional climate, and the level of cultural and economic advancement. For instance, coastal societies often used shells or fish hooks, while in colder areas like Alaska and Siberia, people relied on animal skins and furs. In tropical African regions, elephant tusks and tiger jaws were commonly used as money.
2. Metallic money: As societies progressed from pastoral to commercial stages, the nature of money evolved as well, shifting from the use of animals and commodities to metals. Gold and silver became the primary materials for metallic money because of their rarity, utility, and visual appeal, earning them the reputation of being “natural money.” The adoption of metals eventually led to the emergence of coined money. Historian A.J. Toynbee noted that the coinage system originated in Lydia, a Greek city-state, around 700 B.C., and it remained in use until the 17th century.
3. Paper money: The introduction of paper money marked a new phase in the development of money, beginning in the 17th and 18th centuries. Today, it is the most widely used form of currency. Originally, merchants carried paper receipts instead of transporting valuable metals like gold and silver, which posed safety risks. Over time, as metals became scarce, governments began issuing paper currency that could be exchanged for metal coins, known as convertible paper money. Eventually, this evolved into fiat money, or inconvertible legal tender, which could no longer be exchanged for precious metals.
4. Credit money: With the rise of paper money, credit money, also known as bank money, emerged alongside it, driven by the growth of banking systems and their ability to create credit. Instruments like cheques, drawn against demand deposits, are technically not money themselves but serve the same purpose in transactions. As such, credit money is often referred to as “near money” because it functions like money without being actual currency.
5. Electronic banking stage: Advanced nations like the United States have now embraced the age of electronic banking. Rather than relying on physical cash or cheques, people can now make deposits and complete transactions through digital signals.