Evolution and Meaning of Money

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Money is considered as one of the all-time greatest inventions of mankind. Modern economies are money-using economies. These economies are based on specialization and the division of labor that necessities the exchange of goods and services. Money is necessary to ease the swap or exchange of goods and services. It is generated by the central and commercial banks of a country. Before dealing with the evolution and meaning of money let us have a short recap on some aspects of barter economic system.


Barter system of exchange

In traditional societies, there was no place for money and where a man was self-sufficient. Throughout the ancient stage of human civilization, the needs of the man were few and simple and, therefore every man was self-sufficient. But through the evolution of civilization wants of man enlarged and it was neither possible nor enviable for him to produce the whole thing he wanted.

People realized that it would be advantageous for everyone to practice the division of labor and specialize in the production of one or a few goods. Division of labor makes it possible for people to specialize in those jobs for which they were best suited, increased efficiency, and raised their standard of living. But the division of labor and specialization furthermore made exchange obligatory.

People were required to produce some commodities in a quantity which was more than what they needed so that they could trade the excess amount to obtain whatever other things they required. Thus it becomes necessary for the people to produce some goods in a larger quantity than they could consume themselves so these goods with other persons for something they needed. Thus specialization was accompanied by the exchange.

Before the evolution and new meaning of money (before money was invented) merchandise had to be exchanged for goods and were the foundation of the barter system of exchange. Thus, the barter system refers to the system of exchange where goods and services are exchanged directly for other goods and services. The economy based on the barter exchange is known as the barter economy.

Barter system of exchange was a highly inefficient and clumsy system of exchange. It involved a waste of human efforts. It constrained the span of specialization and division of labor. Barter system of exchange could function effectively only in a primitive economy, not in the monetized economies. Thus, the barter system made it necessary for evolution and the new meaning of money.

Meaning and definition of money

In economics, different terms can be defined in different ways and money is one of these concepts. Thus there is no very general agreement upon the definition of money. It is defined differently by different economists.

Hawtery puts it as, “money is one of those concepts which, like a teaspoon or an umbrella, are defined primarily by the use or the purpose which they serve.”

More conventionally money is defined based on its functions and is called a functional definition of money. In a functional approach too different economists have taken different functional definitions.

According to Prof. Walker, “Money is what money does.”

This definition of money is very wide and at the same time vague too. Money functions a variety of functions, but this definition does not specify any particular significant function of money. Similarly, there are other certain commodities also which can perform different functions of money. On such a basis it may be difficult to differentiate money from those commodities.

Robertson defines money as, “anything which is widely accepted in payment for goods or the discharge of other kinds of business obligations.”

According to G.D.H. Cole, “money is anything which is habitually and widely used as a means of payment and is generally accepted in the settlement of debts.”

Kent defines as, “money is anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.”

Seligman has defined money as, “anything that possesses general acceptability.”

All of these definitions also considered as narrow definitions as they include only one or the other functions of money. Robertson and Seligman emphasize genera; acceptability of money, Cole highlights the standard of deferred payments and Kent stresses two functions of money as a medium of exchange and standard of value. Thus these are incomplete definitions of money.

A suitable definition of money must highlight on all the functions of money as well as basic features of money. On such ground, Crowther has defined the money as “anything that is generally accepted as a means of exchange and, at the same time, acts as a measure and store of value.”

This definition is thus considered the most suitable definition of money because of the following reasons;

  • This stresses all the important functions of money (medium of exchange, a measure of value and store of value)
  • The definition also highlights the essential characteristics of money (general acceptability)

Thus money is anything that is generally accepted as a means of payment used to settle transactions including debt. It is used as a medium of exchange and means of transferring purchasing powers from person to person.

As a means of payment, it has the power to buy things directly from all markets. General acceptability is its most important and unique feature in the evolution and meaning of money.

Empirical definition of money

Different approaches attempted to define money theoretically and empirically. Major four approaches regarding evolution and meaning of money can briefly be discussed below;

The Conventional Approach

Under this approach, money is regarded only as a medium of exchange. This definition stresses the features of money like spend ability, liquidity, etc. In Nepal, this is defined as Narrow Money (Ml). Thus, M1 = C + DD. As per the Central Bank of Nepal’s definition, M1 is the currency (notes and coins) held by the public plus privately held demand deposits with the commercial banks and other deposits of Central Bank.

This approach is also known as currency school. Keynes in his General Theory also followed the same approach to define money. Hicks also defined money under the traditional approach. Empirically Keynes argued that there is an indirect effect of money supply on growth through the effect of money on the interest rate, investment, and output.

The Monetarist approach

This approach is related to Milton Friedman and his followers. Friedman said money as “a temporary abode of purchasing power.” As per the monetarist view, money can act as a temporary abode of purchasing power, if it is kept in the form of cash, demand deposits, or any other assists which are equivalent to cash called near money assists. Thus money under this approach is currency plus demand deposit plus time deposit. M2= M1+TD or M= C+DD+TD. Empirically they conclude that there exists unidirectional causality from money to income in the short run and from money to prices in both the short and long run.

The Liquidity approach

Gurley and Radcliff Committee has given the liquidity approach to the definition of money.  The scope of money has been enlarged in this approach including the liabilities of non-banking intermediaries in the monetarist definition. Money is currency plus demand deposit plus time deposit plus saving bank deposit plus shares plus bonds. So M3=C+DD+TD+ SB+S+B.

The central bank approach

The widest view of money is given by the central bank approach. It regards money as the total amount of credit extended by a wide variety of sources. Under this approach, money includes currency plus demand deposit plus time deposit plus saving bonds plus short term treasury security plus commercial paper plus banker’s acceptance plus net of money market mutual holdings of assets. So M4= C+DD+TD+SB+TS+CP+BA+M3H

Stages of the evolution of money

The increasing difficulties and inconvenience of the barter system ultimately led to the evolution and new meaning of money.

According to Crowther, “Money is one of the most fundaments of all man’s innovation. Every branch of knowledge has its fundamental discovery. In machines, it is the wheel, in science fire, in politics the vote. Similarly, in economics, it is the whole commercial side of man’s social existence, money is the essential innovation of which all the rest is based.”

Money was an invention in the sense that, it needed the conscious interpretation power of man to make the step from a simple barter economy to money accounting. Money was initially used as a unit of account in terms of which all other things were to be measured and compared. It allowed the process of goods to be exchanged in terms of a common unit of account, made non-comparable goods comparable, and extended the scope of the division of labor and specialization. 

The use of money as an account did not remove all the difficulties of the barter. There was still the difficulty of bringing the two parties together. This difficulty was removed when money, the unit of account also become a medium of exchange. With this wheat was no more exchanged for meat rather wheat was sold for money and money was sold for meat. Thus the use of money as a medium of exchange has saved time and effort and made multilateral trade possible. 

There is no accurate information regarding the origin of money.  So it is deep-rooted in antiquity. Without any doubt, the development of money is a secular process and will continue to remain so. 

The general historical steps of evolution and meaning of money can be briefly explained as below;

Animal Money

In the primitive agricultural societies, domestic animals were used as money. Cattle were considered common instruments of exchange. In ancient India, according to Arth Veda, Go-Dhan (cow-wealth) was accepted as a form of money. Up to 4th century B.C. cow and sheep were officially registered forms of money to be used for collecting fines and taxes in the Roman Empire.

Commodity Money

With passes of time, in primitive times in many countries, animal money took the form of commodity money. Several commodities like a precious stone, spears, animal skins, rice, tea, shells, etc. were used as money. People at that time were on the way of searching for easy methods to make the transaction easier.

They found out later that using these certain things or items as a medium of exchange to make the transaction easier and started to use these several commodities as money. The selection of a commodity to serve as money depends on different sectors like agriculture sectors started to use food grins as the money, the Mongolians used squirrel skins as money, and factors like location of the community, climate of the region, culture and economic development of the society, etc. The cold region like Alaska and Siberia adopted animal skin as money, in the typical region of Africa, elephant tusks and tiger jaws were used.

The use of animal and commodity money has so many serious defects like; lack of uniformity and standardization, had insufficient store value as there was the possibility of a loss of value over some time, cost of storing animal and commodity money was very high, this money was not easily transferrable, the problem of indivisibility in case of such sort of monies.   

Metallic Money

There was continued growth and civilization in the communities and with such trade relations by land and sea, the metallic form of money took place and substituted the commodity and animal money. After commodity money, nations came with the use of precious metals such as gold, silver, copper, tin, as money. Money was valued according to the weight and caliber of the metal. Due to the scarcity of precious metals like gold and silver and due to their attractiveness and usefulness, gold and silver were regarded as natural money. The use of metals as money ultimately led to the development of the coinage system.

Metallic money (metal and coins) overcome most of the defects of animal and commodity money, but it had its own short comes. With metallic money, the quick transaction was not possible to do, the larger valued and weighted coins were not easily portable, there was a risk of theft, unsafe and loss of metallic money, these all were making higher transaction cost and metallic money was very expensive because the use of coins led to their debasement and their minting and exchange at the mint cost a lot to the government. 

Paper Money

The next stage added to the development of money was by paper money. The introduction of paper money was in the 17th and 18th centuries and has now become the most popular form of money.

The development of paper money is seen with goldsmiths who kept strong safes to store their gold. As goldsmiths were considered, to be honest merchants, people started keeping their gold with them for safe custody. The receipts of the goldsmiths gave depositors a receipt promising to return the gold on demand. These receipts of the goldsmiths were given to the seller of commodities by the buyers or the owners of the receipts. Thus, the receipts of the goldsmiths worked like money. Such paper money was backed by gold and was convertible on demand into gold. This ultimately led to the development of banknotes.

With passes of time, the scarcity of metals likes gold and silver and their increasing demand increased their price, the convertibility of banknotes into gold and silver was gradually given up during the beginning and after the First World War in almost all the countries of the globe. Since then paper money developed into fiat money or in convertible legal tender and accepted as money and which is backed up by law.

Paper money is economical and much cheaper than any other metals, it has no depreciation as in metals, it is easy to store a large amount of paper money in a small vault. Paper money can be easily replaced and its supply can be changed easily following the requirements of the economy.

However, there is always the danger of over-issue of currency notes as it can be done at the will of the authority and over the issue of its result in an inflationary situation in the economy. It may lack public confidence as it is not backed up by precious metals, there may be a lack of stability in the value of paper money. Paper money does not have intrinsic value. Thus when paper money is demonetized its value falls to zero. Even though having these several defects of paper money, its merits are more than its demerits. In almost every country, paper money is extensively used.

Credit or bank money

Along with the paper money, credit money or bank money also emerged due to the development of the modern banking system, banking instruments, and credit creation activities. In the modern business world, the use of cheque as money is taken as credit money. It is not money but it performs the functions of money. Cheques made for a specific sum, specific time, and expires with a single transaction. It is simply a written order to transfer money. Larger transactions are made through cheques these days and banknotes are used only for small transactions.

The bank money can be transported very easily and it has a comparatively low risk of loss or theft than other types of money. Cheques can be written for the exact amount and there is no need for making change and counting bills and coins. 

Plastic money

The development of the modern business world, the developed countries like the USA, China, etc. have entered into an era of the electronic banking network and has given new dimensions to evolution and meaning of money. With this, people deposit their money into the bank and use electronic means instead of cash and cheques. Here electric banking system does not mean that money is useless. The electronic banking system’s outputs are working as the means of transaction. Till now the electronic banking system is a new step on a long path in the history of the development of money.

During the long process of evolution and the meaning of money, the attributes of money have undergone a drastic change. In the modern era, coins, paper, and credit money are popular forms of money used everywhere. Animal and commodity money were used in primitive societies and with their tragic difficulties, they had obsolete and are rarely in existence in the modern business world. With passes of time and need of revolutionary societies, there has been greater progress in the monetary system in recent times and nowhere electronic means of payments and transaction is in wider use. The stage of evolution and a new meaning of money has been a continuous process and is still evolving and will ever remain so.

Features of Money

The major essential features of money are briefly discussed below;

General acceptability

People accept money as a payment and settlement of deposit. The most unique and important feature of money is that it should be accepted without any hesitation in the exchange of goods and services.


It should be stable in its value. Swiftly fluctuation in the value of money makes it useless as it is a standard measure of the value of all other things. The unstable value of money creates difficulties everywhere.


It should be easily transferable from one place to another for doing business and making payments. Paper money is easiest to carry than metallic money. The invention of credit money has made it more portable. 


Money should be durable. With passes of time, it should not lose its value. Metallic money has a strong quality of durability. Paper money also can be stored for a long time. It is not the subject to quick wear out.


Money should be divisible in small units without losing its value. This feature of money makes it easy to trade smaller and smaller units of commodities.


Money should have the power to provide utility to its user or owner. People who got money should feel the attainment of utility from it. Money is needed because of its ability to ensure utility to its users.


It should be homogenous. Because of uniformity, it is capable to standardize the transactions. The same value, size, weight, picture, symbols are related to the homogeneity of money.

Limited supply

Money is limited in supply. The logic behind this is that it should be restricted in supply to keep its value constant in circulation. The central bank of the nation is responsible for the supply of money.

1 thought on “Evolution and Meaning of Money”

  1. We all know that exchange rates are different everyday. The information that you have shared is really good and helpful for us. Thanks for this information.

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