| It wasn't always that we used paper currency as | | | | banks came about, further backed by laws made |
| money. Contrary to popular beliefs, barter trade is | | | | by the government. These bills of exchange |
| unlikely to be the primary form of trade in any of | | | | became very reliable and has then been |
| the early societies in history. This is because it is | | | | standardized to become the most common type |
| difficult and rare for two people to have a | | | | of physical money today - paper money also |
| coincidence of wants where one person has a | | | | known as banknotes. |
| product that he wishes to trade for a readily | | | | But why use paper? There were times when |
| available commodity that another person is also | | | | some countries had a shortage of their precious |
| willing to trade and vice versa. So instead of | | | | metals such as copper and other metals used for |
| relying to the very limited possibilities of simple | | | | making money, hence paper was used and was |
| barter, people used commodity money where | | | | guaranteed by the government. Moreover, the |
| naturally scarce precious metals, shells and beads | | | | number of saleable commodities was increasing |
| were used as objects of value to be traded for | | | | while scarce precious metals remained limited in |
| products. | | | | amount. Hence if there were a shortage of the |
| Commodity money came about due to the | | | | latter, trade would be problematic. The production |
| problem of coincidence of wants. When for | | | | of paper money is also much cheaper than the |
| example, a farmer wishes to trade one of his | | | | processing of precious and semi-precious metals. |
| sheep for oranges but the latter is out of season, | | | | They are divisible, durable, and easier to carry |
| a third intermediate commodity which is not | | | | than metals which can be very heavy especially if |
| perishable and is in demand (i.e. gold, silver, or | | | | you need to use huge amounts. There are also |
| wine) is traded, hence making the market more | | | | many measures taken to ensure that money |
| liquid and minimizing or eliminating the problem of | | | | cannot be counterfeited, and so it also secure. |
| the coincidence of wants. Standards were then | | | | With an almost universal use of paper money as |
| set for commodity money, such as certain | | | | a means of trade, is it possible to be replaced by |
| weights for gold and silver. After that, metal | | | | electronic or plastic money? Some say no |
| alloys took over because some countries lacked | | | | because money, be it commodity or paper |
| the supply of precious metals, others minted coins | | | | currency needs to be tangible as it is to be traded |
| with seals of their country to discourage their | | | | also for a product that is tangible. However, we |
| citizens from trading with foreigners. Coinage | | | | can never be a hundred percent sure for there is |
| further evolved to bills of exchange; it is similar to | | | | also the advantages and convenience of your |
| an IOU note, which promises to pay the seller a | | | | credit and debit cards. And like the gold and silver |
| certain amount of money which can then be | | | | currency which dominated our economy for the |
| exchanged to a merchant banker for money, | | | | longest of time, it can still be replaced by a better |
| gold, silver or the used commodity currency. | | | | alternative. |
| Making a long story short, institutions such as | | | | |