MONETARY POLICY AND CENTRAL BANKING

L-II
Money and its Evolution

Money indeed makes the world go round. It has always inexplicably been part of our
daily lives, from earning it via jobs and investments to spending it for products,
services, and experiences. It is a necessity no matter the currency and has always
been a symbol of barter and exchange.

Money has been around long enough for it to advance with everything else in this
modern era. Technology has given birth to cashless transactions and even brought
forth the concept of digital currency and cryptocurrency, which still encapsulates the
essence of money.

The concept of digital currency went viral when the world was introduced to Bitcoin in
2009. It is essentially a digital currency that operates independently from a bank,
allowing unchangeable consensus mechanisms to regulate it instead.

To better understand digital currency and its benefits, it is worth looking into a
comprehensive history of money.

What is Money?

Money is what people use to pay for goods and services. Money has evolved from fiat
to digital currencies over the past few years. But before both fiat and digital currency,
money was simply barter; two people would agree to exchange their goods and
services in amounts that they believe had equal value.

How Money Works

For a method of payment to be considered “money,” it has to have three core

functions, it has to be a:

• Medium of Exchange – meaning an item you can use to trade or acquire

something else. In this regard, both parties should agree that the money has
value.

• Store of Value – Money has to hold its value for a definitive period of time,
which is what makes it possible for it to be a medium of exchange. This means
that you must be able to store it and use it at a later time, in other words, it holds
its value over time. This is much different than bartered or traded goods, which
may have an expiration date or might depreciate in value.

• Unit of account – Money must serve as a way to price or measure goods and
services that people want to buy. It becomes a baseline for buying different
items, with some costing more than others. A "unit of account" is a function of
money that allows it to serve as a standard measure for pricing and valuing
goods and services. In this capacity, money provides a common denominator
for expressing the value of various items, making economic transactions more
efficient.
Evolution of Money

Money has come a long way from when people used to barter. Below is a more
detailed overview of how money evolved over the years.

1. Barter

Bartering was the common practice of acquiring goods and services about 3,000 years
before coins appeared. Barter involved a lot of negotiation, haggling, and altering deal
terms before two parties could agree that they would receive the same value for
exchanged goods and services.

However, a barter could take a significant amount of time. Sometimes, a seller would
consider services as a fair trade for their product instead of another product. Let’s say
you are selling a rare item. What you consider fair trade for this item might be the
buyer performing a task that requires weeks to accomplish.

Eventually, people settled on items that could be easily traded like animal skins, salt,
and weapons to make the process faster. These items are often recognized as the
first type of currency.

2. Coins

Because trading goods are not always easy to carry around, evolution happened.
China and Europe were the world’s pioneers in creating objects similar to modern-day
money to make it easier to purchase goods and services.

The first region to use an industrial facility to manufacture coins was in Europe. This
facility is known to this day as a mint. The minted coins were made from a naturally
occurring mixture of silver and gold called electrum and were stamped with pictures
that served as denominations.

3. Paper Currency

In the coming years, banks started to emerge and became the primary institution that
stored metal coins. Banks also issued paper money for borrowers to carry around. At
any time, a person could go to the bank to have their paper currency exchanged for
its face value in metal coins.

This made it easier for people to pay for goods and services in large quantities and
added an extra layer of security and convenience for people.

4. Mobile Payments

If there seems to be a common trend in the evolution of money, it’s that it usually
becomes more portable, accessible, and convenient to handle. Technological
advancements allowed users to carry virtual currency in their mobile devices, like
smartphones, and use it at accepted stores and among peers.
Nowadays, banks have official apps that allow you to make local and international
interbank transfers, globalizing the reach of money.

5. Digital Currency

With mobile wallets on the scene, it was not going to be long before a completely digital
currency would emerge. In 2009, the financial world was taken aback with the
introduction of Bitcoin, the first digital currency. It revolved around the fact that it could
operate with a decentralized authority, moving away from banks and fiat currency.

In the coming years, many more virtual currencies emerged, such as Ethereum (ETH),
Ripple (XRP), Tether (USDT), and Litecoin (LTC), each with their own substantial
share in the market.

The Rise of Digital Currency

Digital currency made a significant impact on the world because of its unique features.
First off, it only exists electronically and does not need a bank or authority to regulate
it. Instead, it turns to technology and encryption.

The emergence of Bitcoin has long sparked a debate among economists about
whether or not it’s here to stay. As of today, it plays a role as a new medium of
exchange, as it offers things traditional money cannot:

• Peer-to-peer transactions without the need for a middleman or governing

authority, such as banks or governments
• Confidential transactions that maintain the privacy of senders
• Easier international trade with lower service fees
• 24/7 access to funds
• Real-time transfers to all accounts
• Increasing adaptability with the emerging new digital currencies and wallets that
can handle transactions with them
• More and more establishments are recognizing the value of digital currencies
and accept them as a payment method.
• Reliable encryption techniques allow for safe transactions and fewer instances
of theft

And this is only scratching the surface. There is no telling what digital currencies will
evolve to be, and right now, it is exciting to study and follow the trends in digital money.

The Future of Money

Money will always be here to stay, and it will continue to evolve and adapt to human
needs. It’s exciting to see what the future holds next for digital currencies.

Bitcoin may be one of the best ways to learn about cryptocurrency, as it set the trend
for altcoins to take flight. If you want to know more about Bitcoin, CoinGeek has tons
of articles perfect for Bitcoin for beginners.
The Four Types of Money

1. Commodity Money

Commodity money is any physical object that has value in and of itself and can be
used as money. Historically, items such as salt, tea and tobacco have been used as
commodity money. Today, precious metals such as gold and silver are considered
commodity money.

The value of commodity money is determined by its scarcity and the amount of labor
required to produce it.

2. Fiat Money

Fiat money is currency that has value only because of government regulation of law.
This means that fiat money is not backed by a physical commodity such as gold or
silver.

The value of fiat money is derived from the relationship between supply and demand
rather than the value of the material it is made of. The government maintains control
over the supply of fiat money and can adjust the supply to meet economic needs.

3. Fiduciary Money

Fiduciary money is any currency that is backed by a promise from the government or
financial institution that issued it. This promise guarantees the value of the money and
ensures that it can be exchanged for goods and services.

Fiduciary money includes banknotes and digital currencies such as credit card and
electronic fund transfer. The value of fiduciary money is based on the trust that people
have in the government or financial institution that issued it.

4. Commercial Bank Money

Commercial bank money is the money that exists in bank accounts. When you deposit
money into a bank account, you are essentially lending that money to the bank. The
bank then uses that money to make loans to other customers.

Commercial bank money is created through a process called fractional reserve

banking. This means that banks are only required to hold a fraction of the money they
receive as deposits and can lend out the rest.

Conclusion

Understanding the different types of money is important for anyone who wants to
manage their finances effectively. Each type of money has its own unique
characteristics and users, and knowing when and how to use each type can help you
make better financial decisions.
By recognizing the different types of money, you can gain a better understanding how
the economy works and how to navigate the financial landscape.

Commodity Money:

Commodity money is a type of money whose value is based on the intrinsic value of
the material from which it is made. Historically, various commodities have been used
as money. Some examples include:

Gold Coins: Gold coins, such as the American Eagle or Krugerrand, have been used
as commodity money because they have intrinsic value based on the metal's rarity
and desirability.

Silver Bullion: Silver coins and bars are another example of commodity money due to
the intrinsic value of the silver they contain.

Cattle: In some societies, livestock, particularly cattle, has been used as commodity
money because it represents real economic value.

Fiat Money:

Fiat money is currency that has value because the government declares it to be legal
tender. It is not backed by a physical commodity but relies on trust in the issuing
authority. Common examples include:

US Dollar: The US dollar is a fiat currency issued by the United States government. It
has value because the government mandates its acceptance for payments.

Euro: The euro, used by multiple European countries, is another example of fiat
money.

Fiduciary Money:

Fiduciary money is a type of money that represents a promise or claim for something
of value, typically backed by a central authority. It includes:

Banknotes: Modern paper money issued by central banks is considered fiduciary

money because it represents a promise to pay the bearer a certain amount of fiat
currency upon demand. These notes are not backed by physical assets like gold but
rely on trust in the issuing authority.

Demand Deposits: Money held in bank accounts that can be withdrawn upon demand
is also considered fiduciary money. It represents a claim on the bank, backed by the
central bank's regulations.

Commercial Bank Money:

Commercial bank money consists of deposits in commercial banks, and it is a part of

the broader money supply in an economy. This type of money is not issued by the
government but is created by commercial banks when they extend loans and credit to
customers. Examples include:

Checking and Savings Account Balances: When you deposit money in a commercial
bank, you receive a claim on that money in the form of a deposit account. This deposit
is considered commercial bank money.

Certificates of Deposit (CDs): When you purchase a CD from a bank, you're essentially
lending money to the bank for a set period, and in return, you receive a certificate
representing your claim on that money.

These various forms of money play different roles within an economy and have distinct
characteristics that influence their use and value.

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%20equal%20value.