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The History of Paper Money

The History Of Paper Money

Home History Of Paper Money
The History Of Paper

The History Of Paper Money
We didn’t always use paper as currency

The History of Paper Money

We didn’t always use paper as currency

Contrary to popular beliefs, barter trade is unlikely to be the primary form of trade in any of the early societies in history. This is because it is difficult and rare for two people to have a coincidence of wants where one person has a product that he wishes to trade for a readily available commodity that another person is also willing to trade and vice versa.

So instead of relying to the very limited possibilities of simple barter, people used commodity money where naturally scarce precious metals, shells and beads were used as objects of value to be traded for products.

Commodity money came about due to the problem of coincidence of wants. When for example, a farmer wishes to trade one of his sheep for oranges but the latter is out of season, a third intermediate commodity which is not perishable and is in demand (i.e. gold, silver, or wine) is traded, hence making the market more liquid and minimizing or eliminating the problem of the coincidence of wants.

Standards were then set for commodity money, such as certain weights for gold and silver. After that, metal alloys took over because some countries lacked the supply of precious metals, others minted coins with seals of their country to discourage their citizens from trading with foreigners.

Coinage further evolved to bills of exchange; it is similar to an IOU note, which promises to pay the seller a certain amount of money which can then be exchanged to a merchant banker for money, gold, silver or the used commodity currency. Making a long story short, institutions such as banks came about, further backed by laws made by the government.

These bills of exchange became very reliable and has then been standardized to become the most common type of physical money today – paper money also known as banknotes.

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But why use paper? There were times when some countries had a shortage of their precious metals such as copper and other metals used for making money, hence paper was used and was guaranteed by the government.

Moreover, the number of saleable commodities was increasing while scarce precious metals remained limited in amount. Hence if there were a shortage of the latter, trade would be problematic. The production of paper money is also much cheaper than the processing of precious and semi-precious metals.

They are divisible, durable, and easier to carry than metals which can be very heavy especially if you need to use huge amounts. There are also many measures taken to ensure that money cannot be counterfeited, and so it also secure.

With an almost universal use of paper money as a means of trade, is it possible to be replaced by electronic or plastic money? Some say no because money, be it commodity or paper currency needs to be tangible as it is to be traded also for a product that is tangible.

However, we can never be a hundred percent sure for there is also the advantages and convenience of your credit and debit cards. And like the gold and silver currency which dominated our economy for the longest of time, it can still be replaced by a better alternative.


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