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Chapter 1: Evolution of Currency

9 Mins 26 Apr 2023 0 COMMENT

"In my dreams I have a plan

If I got me a wealthy man

I wouldn't have to work at all, I'd fool around and have a ball

Money, money, money

Must be funny

In the rich man's world

Money, money, money

Always sunny

In the rich man's world

Aha"

Have you heard this ABBA's famous song Money, Money, Money" launched in 1976? In this song, a woman character dreams about marrying a wealthy man or winning a fortune in a game to find absolute happiness through money.

Whether you like it or not, money is crucial. It brings you financial security and freedom to live your life in your way. Today, money is essential to purchase any goods or services. But have you ever imagined how people transacted with each other in past when currency notes were not there? Let's travel into history and see how the currency note evolves.

Evolution of currency

We often use money and currency interchangeably, but currency is the tangible form of money. Money is used as a medium to trade or exchange goods with each other. Currency is the symbolic value that we have given to the value. It used to be a barter system when currency notes were not there.

Under the barter system, people used to exchange goods with the goods they wanted. For example, a rice farmer may exchange his rice with cattle like a cow or other food items like wheat. The quantity of rice in the cattle barter depends on the perceived value of each item; accordingly, the quantity is fixed. For example, to buy cattle, a farmer may lead to 50 sacks of rice, while an equal amount of rice can be offered to purchase the wheat. There was no fixed rate, and all the trades were based on negotiation.

But the most challenging part is finding a suitable buyer and seller, as both parties should need the goods that the counterparty is selling.

Over time, people started trading with common items like salt, animal skin, weapons, and other tools to buy the goods of their choice. But still, most of the trades are based on mutual negotiation.

Did you know?

Buck is an informal reference to one USD that may trace its origins to the American colonial period when deerskins (buckskins) were commonly traded for goods.

Source: Investopedia

The barter system is gradually replaced with different forms of currency like some metal objects, leather coins, etc., which have a fixed value. The advantage of the currency is that it can be universally accepted within a territory to buy and sell goods. Each currency has a fixed value and all the goods' prices are quoted in the form of the currency value. As per Wikipedia, Paper money was introduced in Song dynasty China during the 11th century. In India, Sher Shah Suri introduced a silver coin called a rupiya in 1540-45.

 

Gradually, the metal coins and currency are replaced with paper currency in the form of bank notes.

 

Did you know?

The pound sterling, the UK's official currency, is the world's oldest currency still in continuous use. It was introduced way back in the 18th century.

 

In the 21st century, people have shifted to digital payments along with the physical exchange of currency. In 2009, a virtual currency like Bitcoin was introduced into the market. These virtual currencies are not issued by any government but are operated by some decentralized authority.

In the recent past, digital transaction methods like UPI offered ease of transaction and became very popular. Even recently, RBI has already rolled out a pilot in the retail version of the Central Bank Digital Currency (CBDC), known as e-Rupee (e₹), on December 01, 2022. The e₹ is in the form of a digital token that represents legal tender.

Despite all the development, money is essential to people's daily lives and is very much required to do business.

 

Currency of different countries

Have you ever seen the difference in the prices of a good in different countries? For example, the price of a standard commodity like 22-karat gold in the USA on a particular day is 57.83 USD per gram, while in India, it is Rs. 4920. Why is there so much difference in prices? If we convert INR value to USD, the price per USD will come out at 4920/57.83 = 85.08 INR. However, if you compare this rate with the actual conversion rate in the market, you will find a slight difference. The actual conversion rate in the market on the same day is 82.6. Why is the gold price not match the actual conversion prices? The difference in local and global prices is due to local demand-supply dynamics, import duties, seasonal demand, etc.

From this calculation, we can understand that the gold value is approximately the same in both countries, but there is a vast difference due to the value of each country's currency.

We need to understand that every country's currency has a different value. For example, 1 USD fetches approximately 82 INR, while the value of 1 euro is roughly equivalent to 88 INR, and JPY (Japanese Yen) equals 0.62 INR. Therefore, it is apparent that each currency has a different value and we will discuss the factors that affect the currency's value in the upcoming chapters.

The rates used above are only for explanatory purposes.

Summary

  • Before the existence of currency, people used a barter system for transactions where people used to exchange goods with the goods they wanted.
  • The barter system is gradually replaced with different forms of currency like some metal objects, leather coins, etc., which have a fixed value.
  • Gradually, the metal coins and currency are replaced with paper currency in the form of bank notes.
  • Every country's currency has a different value, while the value of standard commodities like gold may remain the same in other countries.

Now you have a fair idea of how the currency evolved; we will understand the currency market and how the currency prices are quoted in the market in the next chapter.