Evolution of Money

Money did not appear in its present form overnight; it evolved through stages as societies searched for a more convenient medium of exchange.

1. Commodity money — the earliest stage, in which ordinary useful goods served as money: cattle, grain, salt, shells, animal skins. These had value in themselves, but they were bulky, perishable, not uniform in quality, and difficult to sub-divide.
2. Metallic money — metals such as gold, silver and copper replaced commodities because they are durable, divisible, portable and easily recognisable. Coinage standardised weight and purity, and precious-metal coins were 'full-bodied' (their metal value equalled their face value).
3. Paper (fiat) money — carrying metal was risky and inconvenient, so paper notes issued by the government or central bank came into use. Modern paper money is fiat money — it is money by government decree and legal tender, not because it is backed by metal. Its value rests on public confidence and the authority of the state.
4. Credit / bank money — cheques, demand drafts and bank deposits allow large payments to be settled without handling cash at all. Bank deposits withdrawable by cheque are a major part of the money supply in a modern economy. …