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Personal Finance

Types of Money: from Commodities to Cryptocurrencies

November 2, 2019

There is no proof in history that suggests that pre-historic societies used money as a payment method to buy goods or services. But it is believed that systems akin to Barter methods existed as early as 10,000 BC. Until recently, the modern world was familiar with only one type of money i.e. the currency. After Bitcoin showed up in 2009, cryptocurrency started making headlines and prompted the world to take notice of digital money as well. Here is a look at all the types of monies that the world has used until now. 

Commodity 

For thousands of years, societies around the world used commodities as a method of payment. Most popular among them were gold and silver coins but items of value, such as precious metals and other rare and scarcely available things like peppercorns, alcohol, barley, and salt were also used as money. The value of the money is determined by the value of the commodity. 

Commodity money was the preferred choice for nations for the longest period of time in history. It was convenient while the societies were smaller with developing economies. But as they grew, societies faced a challenge in storing and transporting commodity money in large amounts. This situation paved the way for another medium of exchange known as representative money. 

Representative Money 

National Museum of American History – Image by Godot13

Representative money includes things like token coins, paper money and different forms of certificates representing commodities. They have no value of its own and it is not made from the commodity it represents. Gold and silver certificates are two examples of representative money. Different versions of representative money were used in the ancient civilizations of India, Egypt, China, and Babylon. 

Fiat Money 

Fiat money comes in two forms: coin and paper. Its value is determined by the government and it has nothing to do with the intrinsic value of the material used to make it. Fiat money is also known as fiat currency and usually, it is declared as legal tender by the government. Payments made in legal tender cannot be refused. An advantage of Fiat money is that if the currency is damaged it will be replaced by the government. Now, the current form of money used is actually based on fiat money. 

Coinage 

There are two types of coins: bullion coins which are made of valuable material and stored in large amounts, and coins that are circulated as legal tender. It is believed that the use of coins began during the iron age as metals and alloys were discovered and mined. The most popular metals which are used to make coins are gold, silver, and copper.  

Paper Money  

Paper money was invented in China during the 12th century. The transformation from coins to paper money occurred partly out of necessity and partly out of practical difficulties. As the economies grew, more and more coins were printed and an increased number of people were using it. The volume of coins in circulation was so huge that it was difficult to store and transport. At first paper money was introduced in the form of promissory notes which were used in a localized region. The Song dynasty in the 10th century allowed certain traders to issue banknotes, and finally in the 12th-century issuing of paper currency became the responsibility of the government. 

Europe saw the advent of paper money only in the 17th century. It was invented for the same reasons as in China, and Sweden was the first nation to introduce it. Huge reserves of copper in Sweden resulted in copper coins being heavy and thus paper money became inevitable. However, it was only in the early part of the 20th century that most nations switched completely to paper money from gold and silver standards. 

Digital Money 

Bitcoin, the most popular digital currency, was introduced in 2009. Though digital currencies were invented in the late 1990s, they didn’t pick up steam after the dot-com bubble burst. Then bitcoin brought the idea of cryptocurrencies, which work without a central bank.  

The history of money is as interesting as money itself. It has come a long way from the days of barter systems to the use of cryptocurrencies for purchasing goods. But, be it in any form, money is an integral part of the world and its sustenance. 

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