explain how money evolved from the barter system to digital payment method
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Money, as we use it today, is the result of a long process. Its physical characteristics are worthless without the value that people place on it. We use it as a medium of exchange, allowing us to trade goods and services.
Standard money did not always exist and in its early ages, people utilized other forms to exchange goods and services. With the changing requirements of economies and the evolution of technology, money and payments have changed considerably. As we speak, credit card transactions and digital currencies enable people to purchase goods and services virtually, in a matter of seconds. On top of that, there are currently over 150 currencies worldwide.
How did we get here? Let’s find out more about the evolution of money, how it was used in its early ages, and what brought us where we are.
The Barter economy
When barter was used as an exchange medium, the needs of people were very limited. The barter system has been used for centuries and it dates to 6000 BC. This trading method doesn’t involve money and it relies solely on exchanging goods and services for other services and goods in return.
Bartering was common among Mesopotamia tribes and it was later adopted by Phoenicians. Belongings were exchanged for munition, herbs, food, and tea. Salt was considered a common exchange item and Roman soldiers wanted it so much that their salaries were paid with it. Europeans traveled around the world to barter crafted items and furs in exchange for silks and perfumes. Livestock was as well demanded in bartering. If someone owned cows and sheep, it meant they were wealthy.
Commodity Money
Similar to barter, commodity money worked under the same principle, with the only difference that societies placed different values on specific items. Let’s assume that we have two farmers, X and Y. X is growing olives and Y is growing potatoes. Farmer X needs potatoes and offers farmer Y olives in exchange, but Y doesn’t need olives at all. As a result, Y refuses the offer and the exchange fails. This was the main challenge of barter. It was quite hard to agree on two goods to be exchanged.
Therefore, common things like shells, salt, and pebbles (small stones) were looked at as commodities for exchange. This enabled farmer X to sell his olives in exchange for shells (as money), and with those shells, he could simply buy potatoes from farmer Y. Commodity money brought the birth of money in ancient times and economies started to develop because of that.
Metallic Money (coins)
As people were using commodity money more often, they identified new problems. This trading medium had three major common defects – perishability, indivisibility, and heterogeneity. They couldn’t be kept for a long time, so people couldn’t repay their loans or save it for other needs in the future. Besides that, commodities were not the same in every market, and trading with other regions was very difficult.
King Alyattes of Lydia became the first to mint official currency in 600 B.C. This currency was represented by coins, made of silver and gold. Coins were stamped with pictures to avoid counterfeiting. Each coin had a different value which made it easier for people to estimate the cost of items. As a result, this adopted currency helped Lydia’s both internal and external trade, classifying it as one of the richest empires in Asia Minor. If you’ve heard the saying “as rich as Croesus”, it refers back to the last Lydian King that issued the first gold coin. Soon after that, countries started to mint their own coins with different values.
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