Evolution of Monetary Transactions

February 22, 2016

From Grains to Rupees and our current monetary system

Imagine being a part of those days when barter system was the medium of exchange. Yes barter! Times when we had to exchange commodities and services to acquire other commodities and services. Unless there was a double coincidence of wants we would never be able to acquire what we desired. Those barter days were definitely good from the point of view of the Gandhian principle of “self-reliance”. The drawback here was that everyone was trying to become self-reliant jack of all trades and hence this system was less likely to produce specialists like engineers, scientists, doctors and so on.

The evolution of money as a medium of exchange has made life so much easier. It has helped facilitate the effortless exchange of goods and services and has minimised the time taken to execute trade dealings. Today we have evolved from singular deals between two craftsmen to trade between nations. Our countries have monetary policies laid down by respective central banks that manage money supply, interest rates and availability of credit which in turn aids the achievement of economic growth.

Barter - Goods for goods

This fundamental form of trade dates back to 6000 BC and was introduced by the tribes of Mesopotamia. Since this was a need based exchange of commodities for commodities it lacked value equivalence. Though the process seemed simple this form of exchange was not free from difficulties. Imagine a carpenter needed to purchase rice, all he had to exchange was the furniture he made. Now unless a rice seller is willing to accept furniture in exchange of rice the deal would not click. Later commodities became inconvenient for trade because they were perishable, indivisible and inconsistent in value. Hence the need for a standard medium of exchange was felt. Some surprising facts recently reported in the International Reciprocal Trade Association (IRTA) states that 65% of Fortune 500 companies engage in barter in one form or another. Mercedes-Benz once bartered 65m bananas for buses in Ecuador, a landmark scenario to say in the least. Start-ups are also using the age-old system to cost effectively manage their resources. As with Round Table Companies, Illinois, who bartered the creation of a graphic novel in exchange for the full design and execution of their new website. The exchange lasted a fruitful 7 months long. Go figure!

Temple safes - Discovery of metal

No sooner did man discover metal did he use it to turn the previously made utensils and weapons of stone into metal ones. Later, the awareness of metals advantages of value, divisibility and ease of transportation led to metal being used as the main standard of value and medium of exchange. In 7th century B.C., the first coins resembling current ones appeared. It had definite weight and form, mark of value and the issuers seal. For many centuries, countries minted their most highly valued coins in gold, using silver and copper for lesser value coins. Gold was deposited in temples for safe-keeping considering it was a safe refuge and constantly guarded.

Paper money and monetary system

In ancient Mesopotamia, ca. 9000 BC, receipts in the form of clay tablets, the forerunner of our modern day paper money, were used to record transfers between parties. While the world might have still been dealing in coins, by 1,200 AD the Chinese had begun the use of paper money from minting it to handling various denominations. Eventually the concept of banking using bank notes for borrowers and depositors developed where one could carry these notes and exchange it at banks for its face value in gold and silver coins.

In India, the first bank was started by M/s Alexander & Co. in 1770 known as the 'Bank of Hindostan' The Bank finally went under when its parent firm M/s Alexander and Co. failed in the commercial crisis of 1832. Wide use of bank notes, however, came with the note issues of the semi-government Presidency Banks, notably the Bank of Bengal which was established in 1806 as the Bank of Calcutta.

In our current booming age of e-Commerce, Paperless transactions through the internet, ATM, cards and mobile devices have surpassed paper-based ones in the year leading to March 2015, reiterating the fact that Indians are moving towards virtual payment. What is left to be seen now with all the advancements is, if we can gradually go from a reduced dependency on paper based money to a completely paperless transactions.

Electronic money

From goods and commodities to metal and paper, to plastic and now electronic money. We have evolved and continue to do so. Card directed payments have seen a massive increase of 25% year-on-year. And now with the arrival of virtual wallets on our mobile phones payment solution have become more convenient to the consumer. One such example is 'Pockets', a wallet by ICICI Bank, which enables a user to send or request money to a bank account, mobile number, an email ID or even a friend on Facebook. The beauty of using mobile wallets as a payment solution is that it’s not just quicker and effortless, it’s also lighter on your pocket because of all the attractive deals that it offers.

Money in its varied forms will continue to evolve consistent to the world it helps create. For the current generation it has taken an electronic or digital form. But the concept of money on the basis of its value and requirement will remain constant: for the exchange of goods and services.

 

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