Money is a widely used and accepted medium of exchange. It is anything that can be accepted as payment for goods and services or as a means of debt settlement. Money is the most liquid (it is easy to sell in the market like gold, silver, and so on) of all assets in the sense that it is universally accepted and thus can be easily exchanged for other commodities. This topic is very important for the UPSC IAS Exam Economy subject.
- What is Money
- History of Money
What is Money
- Money is a commonly accepted medium of exchange.
- Money is anything that can be generally accepted as payment for goods and services or settlement of debts.
- Money is the most liquid (it is easy to sell in the market like gold, silver etc.) of all assets in the sense that it is universally acceptable and hence can be exchanged for other commodities very easily.
Historical Background – How Concept of money Evolved
- Money as a medium of exchange was not used in early human history since households were self-sufficient and there was little exchange of goods.
- Whatever exchange occurred between the households was done through barter or the exchange of goods for other goods.
- As there was no common unit of account and medium of exchange, the barter system did not allow for direct purchases of goods.
- The problem with a barter system is that in order to obtain a specific good or service from a supplier, one must also have a good or service of equal value that the supplier desires.
- In other words, in a barter system, the exchange can occur only if two transacting parties have a double coincidence of wants.
- The likelihood of a double coincidence of wants is quite low and making the exchange of goods and services rather difficult.
- To solve the problems of barter trade, early humans devised a payment and exchange system that allows the direct purchase of goods using any instrument that has the following characteristics:
- Unit of account
- High Liquidity
- Possible to store
- It must be desired by all (It should have high demand)
- It is easily exchangeable (Medium of Exchange)
- In the beginning, there were only a few commodities that were required by everyone.
- Commodities such as arrows, bows, and seashells, which are mostly used for hunting, became the first form of medium of exchange and thus acted as money.
- When early humans transitioned from hunting to agriculture in the second stage of evolution, animals such as cattle, goats, and sheep became a medium of exchange and acted as money.
- Since commodities have limitations such as a lack of a standard unit of account, limited supply, and natural factors, etc. their use was limited and was eventually replaced by other forms of money.
- Commodity money evolved into metallic money as human civilization progressed.
- Metals such as gold, silver, copper, and others were used because they could be easily handled and quantified. It was the primary form of money for the majority of recorded history.
- With the passage of time and technological advancements, the hard form of gold and silver was replaced by a coinage system (gold and silver coins) that was widely used as money.
- It was discovered that transporting gold and silver coins was both inconvenient and dangerous. As a result, the invention of paper money marked a watershed moment in the evolution of money.
- The country's central bank regulates and controls paper money (RBI in India).
- At the moment, a large portion of the money is made up of currency notes or paper money issued by the central bank.
- The emergence of credit money occurred almost concurrently with the emergence of paper money.
- People keep a portion of their cash in bank deposits, which they can withdraw at their leisure via cheques.
- The cheque (also known as credit money or bank money) is not money in and of itself, but it serves the same functions as money.
Plastic money, such as credit and debit cards, is the most recent type of money. They intend to do away with the need to carry cash when conducting transactions.
- Mobile payments are payments made for goods or services using a portable electronic device such as a cell phone, smartphone, or tablet.
- Money can also be sent to friends and family members using mobile payment technology.
- Paytm, PhonePe, Google Pay, and so on are increasingly competing for retailers to accept their platforms for point-of-sale payments.
- A cryptocurrency is a type of digital asset that is based on a network that is distributed across many computers.
- Because of their decentralized structure, they can exist independently of governments and central authorities.
- Cryptocurrencies are not widely accepted as money, owing to their lack of legal tender status.
- El Salvador, on the other hand, became the first country in the world to accept bitcoin as legal tender in June 2021.
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