Money is defined as anything that is accepted as a means of payment for goods or services. It is a legal tender issued by the government of a particular country through its central / national bank for transaction purposes.
A bank can be defined as a financial institution that receive deposits from people and lend these funds to firms and individuals. Banking simply means a process through which the bank engage in the business of safeguarding money and issuing of credit. Banks act in accordance with central bank, which regulates the operation of local banks in any country. The central bank does this to prevent inflation which may occur due to increase in money supply in the economy. This paper discusses the evolution of money. It also looks into the functions and characteristics of money.
In ancient times, traders used to exchange goods for goods. There was a central market and people could converge there with their items. For example, a person would bring a goat in the market to exchange with an item he/she wanted. The problem was lack of double coincidence of want.
Another problem that was encountered in barter trade was the issue of divisibility of some items. For example, if a person had a cow and needed only two buckets of beans it became hard to transact since it was hard to harmonize the value of the two. So it lacked common measure of value and some commodities were hard to divide into smaller units. These types of problems made barter trade to be a hard task to acquaint. The system of exchange was crude and clumsy.
People then decided to introduce other items to try and solve this problem. Initially, they introduced commodity money (i.e. skins, beads, hide, fur and shells among others). People started using these items to purchase whatever they wanted. Different tribes came with unique items from their areas and initially these commodities were accepted as a means of exchange.
A man who had a surplus of food would gladly exchange it for beads even though he had no particular desires for them. Certain commodities came to be recognized as best fitted to serve the purpose of a go-between in making exchanges. Then metallic money evolved where people identified durable items such as copper and gold for exchange. Gold was valued at a considerable higher value compared to other metals. Traders started using gold for exchange of goods and eventually it was accepted by almost everybody. Traders would go to goldsmith and get commodities they wanted with respect to the quantity of their gold.
The goldsmiths were valuing the metal then exchanging it with the respective quantity of item the trader needed. Afterwards, the goldsmiths started issuing traders with receipts that were used as medium of exchange. It acted as a goldsmith bank because they kept these items for traders and provided individuals with receipts, which were accepted even by other people. This gave rise to development of banks that started printing notes and providing coins.
It acts as medium of exchange where it is accepted by both buyers and sellers; the buyer gives money to the seller in exchange of commodities. It acts as a store of value where money held by individuals can be taken into the bank account for future use.
Once it is in the bank it cannot go bad like in the case of barter trade where some items were highly perishable and required immediate exchange. Money also acts as a standard for differed payment by the fact that goods can be collected on credit to be paid at a later date. All these functions differ so much with barter trade, which was rather complicated.
Money compared to the barter trade has some distinctive features which are much preferred.
The divisibility factor makes money to ease the burden of valuing a commodity. Money can be broken into small denominations that make it easy to make transactions. Durability feature of money remove the burden of spoilage; money is made of durable items that stays for a very long time without deteriorating in value.
Portability is another characteristic of money where huge amount of money can easily be carried by an individual. Money is homogenous, that is, all parts of units have uniform value.
In tracing the evolution of money we have seen that it plays two major roles in business transaction; as a medium of exchange and measure of value. As a medium of exchange it serves as a go-between in the exchange of commodities; in barter trade, for the item to be accepted a double coincidence of want had to prevail otherwise it was hard to acquire the commodity of your choice. Measure of value also helps in pricing of items unlike in barter trade where it was a mere guess. Thus, money plays a major role in the economy.
Davies, Glyn. A History of Money from Ancient Times to the Present Day, 3rd ed.
Cardiff: University of Wales Press, 2002. White, Horace. Money and Banking, New York: General Books LLC, 2009. Glyn, Davies. A History of Money from Ancient Times to the Present Day, 3rd ed.
Cardiff: University of Wales Press, 2002. Glyn, Davies. A History of Money from Ancient Times to the Present Day, 3rd ed. Cardiff: University of Wales Press, 2002.
Horace, White. Money and Banking, New York: General Books LLC, 2009.