Evolution of Money

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From history to the present money transactions are done in different forms. Depending on the type of material or the product and the quantity offered. 

Substance >>> (human effort) (labor) >>> THING >>> (human effort) (labor) >>> COMMODITY

There is an exchange of value in different forms where the value is defined as follows:

  1. Elementary form of value
  2. Expanded form of value
  3. General form of value

Some of the examples are below:

1. Elementary form of value

  • 1 cloth = 1 boat
  • 1 pot = 1 glass

2. Expanded form of value

  • 1 cloth = 1 coat / 1 glass / 1 pot

3. General form of value

1 coat, 1 glass, 1 pot, 1 plate, 1 kg grain = 1 gold coin (all together will be worth a gold coin) which helps in understanding the availability, quality, and importance that gradually creates value to the product as time passes. The value of a product or service is also defined as the human effort and time (Value = Human effort & Time)

The evolution of money, from its earliest forms to the present, has been marked by significant growth in terms of both volume and utilization. Key statistics across various stages of money’s history highlight this exponential expansion:

1. Barter System (Prehistoric Era to Early Civilizations)

  • Time Period: Up to 3000 BCE
  • Key Statistic: 100% of transactions involved direct exchange of goods and services without a common currency.
  • Value: Trade was based entirely on mutual need, and economic activity was localized, with very low transaction volume due to the inefficiencies of bartering.

2. Commodity Money (3000 BCE - 7th Century CE)

  • First Known Commodity Money: 3000 BCE, Mesopotamia. Silver was commonly used as a form of commodity money.
  • Growth in Trade Volume: The use of silver, gold, copper, livestock, and other commodities as currency expanded trade routes, enabling larger and more complex economies.
  • Statistical Insight: By the time of the Roman Empire (27 BCE – 476 CE), the use of gold and silver coins significantly increased trade volumes, with estimates of over 5 million coins in circulation at the height of the Empire.

3. Introduction of Paper Money (7th Century - 17th Century)

  • First Paper Currency: China, 7th Century (Tang Dynasty), which later spread to Europe by the 13th Century.
  • Impact: Paper currency allowed for far greater volumes of money to be traded, representing the value of large quantities of commodities without physically transporting gold and silver.
  • Key Statistic: By the 13th century, the Yuan Dynasty in China had paper money backed by silver reserves, with circulation growing rapidly and significantly expanding domestic and international trade.

4. Gold Standard (19th Century - Early 20th Century)

  • Adoption: By the late 19th century, most of the world’s major economies had adopted the gold standard.
  • World Gold Holdings: By 1900, world gold reserves held by central banks amounted to an estimated 400 million ounces.
  • Global Trade Growth: Between 1870 and 1913 (the peak of the gold standard era), global trade increased by 1000%, facilitated by the use of standardized currencies backed by gold.
  • Currency in Circulation: The U.S. alone had more than $1.7 billion in gold-backed currency in circulation by 1913, fueling economic growth and industrialization.

5. Fiat Money (Post-1971 – Present)

  • End of the Gold Standard: In 1971, the U.S. abandoned the gold standard, and most of the world followed suit, adopting fiat currencies.
  • Global Money Supply Growth: In the period from 1971 to 2021, the total global money supply (M2) grew exponentially from $2.5 trillion to over $95 trillion.
    • The U.S. dollar supply alone increased from $1.4 trillion in 2000 to more than $20 trillion in 2020.
  • Inflation and Money Supply: During this time, central banks managed fiat currency supply through monetary policy, resulting in varying inflation rates. For example, inflation in the U.S. from 1971 to 2021 averaged 3.9% annually.

6. Digital Money and Cryptocurrencies (21st Century)

  • Global Digital Transactions: In 2020, the total volume of digital payment transactions reached $5.44 trillion, projected to surpass $10.5 trillion by 2025.
  • Cryptocurrency Market Growth:
    • Bitcoin, launched in 2009, was the first decentralized cryptocurrency. By 2021, the market capitalization of all cryptocurrencies had exceeded $2.5 trillion.
    • Bitcoin’s price surged from $0.08 in 2010 to over $60,000 in 2021, reflecting an annualized growth rate of over 200%.
    • As of 2024, there are more than 23,000 cryptocurrencies actively traded globally, with Bitcoin accounting for about 40% of total market value.
  • Central Bank Digital Currencies (CBDCs): Over 100 countries are exploring or developing their own digital currencies (CBDCs), with China’s digital yuan and the EU’s proposed digital euro leading the charge.

7. Global Cash Circulation (2020 - Present)

  • Cash in Circulation: Despite the rise of digital currencies, cash remains significant. In 2021, the total amount of cash in circulation worldwide was estimated at over $8 trillion.
  • Declining Cash Use: In advanced economies like Sweden, cash usage accounted for only 9% of retail payments by 2020, while in emerging economies like India, it still constituted over 70% of transactions.

8. Key Utilization Trends Over Time

  • Trade Expansion: The invention of standardized currency (both commodity and fiat money) has allowed international trade to flourish. The value of global exports rose from about $2 trillion in 1980 to over $24 trillion in 2020.
  • Financial Inclusion: Access to formal financial services has increased dramatically, with about 69% of adults worldwide having a bank account as of 2021, compared to 51% in 2011.
  • Digital Payment Systems: Platforms such as PayPal, Venmo, and mobile payment services like Alipay and M-Pesa have revolutionized financial transactions. For example, M-Pesa in Kenya processed $82 billion in transactions in 2020, equal to almost 50% of the country’s GDP.

Conclusion

The exponential growth of money—both in terms of supply and its utilization—reflects the ongoing evolution of economies and societies. From simple bartering to complex digital ecosystems, money has consistently served as the most essential tool for representing human effort, facilitating trade, and driving economic development. Today, digital currencies and decentralized financial technologies are poised to continue this evolution, potentially transforming the global financial system in the decades to come.

Location: India

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