Saturday, August 22, 2009

Origin and Growth of Money

The word money has been taken from Latin word “Moneta” which denotes godess Juno in whose temple money was minted in Rome. At present the Latin word pecunia is used for money. It is generally believed that pecunia is derived from pecus meaning cattle which have served at one time or another as a medium of exchange and a measure of value. People think that man done nothing to discover money but it appeared at its own according to the needs of circumstances. This idea is known as theory of spontaneous growth. According to some people money was discovered to overcome the defects of barter system. This idea is known as theory of evolution.
Some people think that money arose as unit of account from customary ratios of exchange. There are others who hold that money originated as medium of exchange. This theory is more widely held and is generally believed that some articles general utility began to serve as a medium of exchange and became money. This was due to its general acceptability.
Throughout the history of civilization money has passed through different stages. Historically the development of money in the present form has evolved through the following stages. These stages are discussed as under.
1. COMMODITY MONEY
The earliest money which came into use and was accepted in the exchange of goods was commodity money. A large number of item such as wheat, cotton, skins, arrows, bows, camels, goats etc have served as commodity money at different times and places depending upon the stage of development in that country. As time passed on it was found that these commodities were not best suited as general means of making payments.
The main problems with commodity money were that they lacked (a) durability (b) portability (c) divisibility (d) uniformity and standardization (e) regularity in supply (f) and had high opportunity cost, so search was made to find more suitable and convenient mean which is generally acceptable in payments for the goods and services. The search led to the discovery of precious metals like copper, silver and gold.
2. METALLIC MONEY
The next form of commodity money was the use of metals such as gold, silver, copper as medium of exchange. Such coins had in intrinsic value. Which was reflected in their face value? The use of un-coined metals as a medium of exchange created further difficulties; it became difficult for people to known the weight and value of the peiece of bullion at sight. The discovery of mines of gold and silver and their exhaustion caused fluctuations in the supply of money. Transaction and storage of precious metals also became dangerous. Debasement of metal further caused inconvenience and complications in exchange further advancement in the evolution of commodity money was the replacement of un-standardized metal ingnots with a standardized coinage. The metallic coins had a guaranteed weight of value by a competent authority. They had also the intrinsic value and so commanded a universal respect. With the passage of time these full bodied coins also proved a failure as a good medium of exchange. Coins were clipped abraded and melted down. They were also debased with the discovery or exhaustion of mines the intrinsic worth of the coins begins to depart from their face value efforts were made to find out a better unit of account.
3. CONVERTIBLE PAPER MONEY
In the evolution of money the next stage was the discovery of convertible paper money as a commodity money substitute. The convertible paper money is paper money that may be redeemed for a specific commodity at a rate of specialized on the currency. Before 1914 the bulk of bank notes were convertible into gold. The bank notes of various denominations had a promise by the bank to pay to the bearer as specific amount of gold on demand. The practice of exchanging paper currency for gold was eliminated after 1914 in England and in 1933 in USA. In today’s economy the paper notes are inconvertible notes. They are neither fully nor fractionally convertible into gold. The paper money developed into inconvertible money is called flat money.
4. FLAT MONEY
Flat money consists of paper money that derives its status as money from the power of the state. That money is money because government says it is money. It is not backed by promise to pay something of intrinsic value. It is accepted because government declares it legal tender. The creditors must accept it as a medium of exchange and as a payment for debts.
5. CREDIT MONEY
Another most important component of money supply is the deposit money or credit money. Deposit money consists of deposits at bank and the financial institutions which are subject to withdrawal by cheques. In developed countries of the world 95% transactions are carried on with cheques. Cheques are a safe way of transferring the ownership of deposits in financial institutions. They are normally acceptable as medium of exchange.
6. ELECTRONIC BANKING
In all the developed and many developing countries of the world including Pakistan the commercial banks have entered into an era of electronic banking. The customers of banks having deposits in their accounts can make purchase, pay bills, transfer money simple by electronic signals.
7. NEAR MONEY
The final stage in evolution of money has been the use of bills of exchange, treasury bills, debentures, saving certificates etc. They are known as near money. They are close substitute for money and are liquid assets. The final stage of its evolution has become intangible. Its ownership ins now transferable simply by book entry.

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