Before we study what is money, we need to understand its evolution. So, let’s begin …
Evolution of Money –
In the beginning money wasn’t the same as we know it today. It has undergone a long process of historical evolution. Money is the most important invention of modern times.
Use of Commodities as Money –
In the beginning peoples used commodities as a medium of exchange. Any commodity which demanded and accepted as a medium of exchange was a form of money.
People used seashells, pearls, beads, arrows, furs, skin etc. in the early stages of human development, mainly in hunting stage of human development. With further development in the pastoral age, animals such as cow, sheep, goats were started being used as money or as a medium of exchange of goods. The use of animals as money had some certain problems, because all animals (cows, sheep’s, goats) were not identical, they couldn’t be used as a standard unit of measurement. Commodities and animals can’t serve as a satisfactory store of value.
Use of Metals as Money –
With the further development of human civilization, commodities and animals were replaced by precious metals such as gold and silver for being used as money.
Crowther Ahmed up the superiority of precious metals like gold and silver for monetary use “they are easily handled and stored, they don’t deteriorate, they have just the right degree of scarcity and they can be relied upon neither to increase nor to diminish in quantity except gradually.”
With the invention of coinage, coins made of gold and silver began to be used as money rather than simple and plain bits of gold and silver whose value was difficult to measure. Precious metals were used as money not because they were valuable but because they were scarce. For a thing to serve as money scarcity is more important than value. It was the main form of money throughout the major portion of recorded history.
Use of Paper Money or Bank Money as Money –
In the beginning paper money, that is, paper notes were simple claims to and substitutes for metallic money. But with the passage of time paper money came to be regarded as money itself.
Paper money took the form of bank notes were not mere substitutes but were considered as an addition to the supply of money.
In the starting, notes could be issued by all commercial banks but with the passage of time when paper money became inconvertible into metallic money issuing of notes became the monopoly of the Central Bank of a country.
In early times when notes were introduced they were backed by an exactly equal amount in gold or silver kept in reserve by the issuing authority. These notes could be exchanged for gold or silver coins when demanded and did nothing more than representing metallic coins. This type of paper money or notes, therefore, were called representative paper money. Since paper money now a days is not convertible into gold or silver, representative paper money is now not found anywhere in the world.
When the paper currency issued by the Central Bank was fully backed by the reserves of gold or silver of equal value kept by it, this paper currency system was called “Full Reserve System”.
With the passage of time it was thought that a cent percent reserve of gold against paper currency issued was not needed and instead only proportion of 30 to 50 percent was enough to convert the notes presented for conversion into gold. Therefore, “Proportional Reserve System” was adopted. According to this, the issuing authority was called upon to keep a 30 to 50 percent of the total amount of notes issued as gold reserves. A percentage of 30 to 50 was considered enough to honour the notes when they were presented for exchange into gold. It was based upon the fact that people found notes very convenient and they seldom thought of presenting them to the issuing authority. Therefore, full backing of gold was not required.
In India, this proportional reserve system was adopted in 1927 and continued till 1957.
So, now a days paper money is of inconvertible type, means it can’t be comverted into gold or other precious metals. So, when paper money is inconvertible, the issuing authority is not responsible to convert the paper notes into gold.
The currency notes issued by the Central Bank of a country are ‘Fiat Paper Money’, that is, they are issued by the fiat means ‘order, of the government’. As they are legal tender, they are generally acceptable in exchange for goods and services.
It is important to note that, ‘promises to pay’ written on the currency notes are not ‘promises to pay’ something else. For these notes, only other paper notes can be given whose value would be equal to the face value of the note you present for payment.
But as time passed even proportional reserve system was thought inadequate for the monetary needs of the growing economy. It was abandoned in India in 1957 and was replaced by the ‘Minimum Reserve System’.
According to this, Reserve Bank was required to keep only a minimum amount of gold and other approved securities (such as dollar and pound sterling) of the value of 200 crores Rupees. Out of these reserves it was required that gold must not be less than the value of 115 Crores Rupees. On the basis of these minimum reserves l, Reserve Bank of India could issue any number of notes or currency subject to the economic condition of the country.
What is Money –
Professor D.H. Robertson defines money as “anything which is widely accepted in payment for goods or in discharge of other kinds of business obligations.”
According to Crowther, “Money can be defined as anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and a store of value.”