The Evolution of Money

1. The Evolution of Money By Anand Shirur

2. Agenda What does money signify ? The ladder of economic civilization The first evolutionary step The second evolutionary step Gold Standard & Brettons Woods The third evolutionary step The fourth evolutionary step

3. What does Money Signify • Medium for exchange of Value • Count of ‘your’ value addition to society • Success & Self Esteem • It's the center around which world revolves • “ Its all about money, honey”........

4. Why was Money Invented ? • Specialization of Labour made economic exchange a fundamental necessity • When the division of labor has been once thoroughly established, it is but a very small part of a man’s wants which the produce of his own labor can supply.. – Adam Smith, Wealth Of Nations

5. The Ladder of Economic Civilization Stages in development of money • Barter trade • Commodity money • Standardized Coinage • Representative Money • Fiat Money • Credit Money • Electronic Money

6. Step 1 – Barter Trade • Most primitive form of reciprocal exchange • Barter involves only two people; each has something the other wants • “Hungry weaver is searching for a naked farmer” • Limitations • Coincidence of wants • Perishability • Inefficient

7. The First Evolutionary Step Commodity Money • Valued Commodity as means of exchange • Early examples – Shells, Food Grains, Cow etc • Evolved into Metallic Money – Durable, Fungible and Portable

8. The First Evolutionary Step Standard Coinage • Egypt used gold bars in 400 BC • Discovery of Touchstone – tool for assaying value of gold in an alloy • Concept of Standard Coinage was introduced • Govt. assertion that value of money lay in the emblem • Debasement of Currency – coin as unit of value (not weight)

9. The Second Evolutionary Step Representative Money • Token or certificate (made of paper), backed by an equivalent reserve • Started with 'Warehouse Receipts' issued by ‘Girobanks’ • Receipts as medium of exchange • Soon receipt issuance overshot actual reserves to accommodate loan demand • Girobanks introduced std accounting methods & deposit accounts for depositors

10. The Second Evolutionary Step Fiat Money • Money, not backed by reserves • Derives stand-alone value by government decree • Money is a 'Forced / Legal Tender'

11. Gold Standard – 1901 to 1932 • Money system in which regions' common medium of exchange are paper notes freely convertible into pre-set fixed quantities of gold • Gold standard was intended to force monetary prudence by respective govt. • Abandoned due to high war expenses followed by deflation / depression

12. Brettons Wood – July 1944 • Conference after 2nd World War to discuss financial architecture • Resulted in • Formation of IMF and IBRD (World Bank) • Gold was replaced with Dollar as international reserve currency • However dollar was pegged to gold at pre-fixed rate • Currencies were made convertible

13. The Third Evolutionary Step Credit Money • IOUs, Promissory Notes, Overdraft • Exists in conjunction with other forms of monies • Enabled 'Fractional Reserve Banking' – thereby increasing money supply • When over-leveraged, has led to financial bankruptcies

14. The Fourth Evolutionary Step Electronic Money • Internet fund transfers • Mobile fund transfers

15. Thanks