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In this part we shall have a look at the evolution of money and the various exchange rate systems prevailing till the middle of the 20th century. The exchange of goods and services has been prevalent since thousands of years and a system of barter developed over the years as man looked for ways to fulfill his needs for different commodities and services. The initial exchange was limited to items of food and gradually as man explored, invented and traveled to distant land it became necessary to have a medium of exchange. This necessity led to the evolution of money. The Evolution of money Primitive societies used various commodities as a medium of exchange. These ranged from grain, shells, tobacco, rice, salt, ivory to cattle, sheep, skins and slaves. These were the commodities, which were in greater demand and were thus easy to exchange. However, while a farmer could easily meet his requirements for various goods by offering his wheat, a person having cattle would find it difficult to exchange it for salt. He would either have to take a very large quantity or take some other easily traded commodity. Thus the marketability of a commodity determined its acceptance and use as a means of exchange. Marketability of a commodity was determined by the familiarity with the commodity and its quality, divisibility, uniformity and ease of transportation and storage. Over time, with the introduction of metals and coins, another important quality of the commodity emerged. It became a medium of exchange, having a value much greater than its intrinsic value. It was no longer used for consumption, but for acquiring other commodities for consumption. This was the evolution of money. The use of coins facilitated exchange as it was easy to determine the value of a unit, was easily divisible and acceptable to all. Two metals, gold and silver were favoured for minting of coins because of their intrinsic value. There however still remained the inconvenience of carrying a large amount of coins or bullion and it was not easy to transfer or transport large amounts. It was in the 17th century that the practice of depositing coins and bullion with goldsmiths, moneychangers, mint masters etc started. These persons enjoyed the trust of the people and were entrusted with the job of safe keeping of surplus money. The next step was the transfer of value by assignment rather than by physical delivery. Goldsmiths in England were among the first to start the system of money by book entry. This was a major development and ultimately led to the spread of banking services. People were confident that they would receive a certain value, on demand, against the bank note they possessed. The history of foreign exchange can be traced back to the time moneychangers in the middle east would exchange coins from all over the world. Foreign exchange dealings with gold as the standard of value started around 1880 after more than a hundred years of bimetallism where both gold and silver were commonly used as a measure of value. The Gold Standard
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