Historical development of money, Managerial Economics

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The Historical development of money

For the early forms of money, the intrinsic value of the commodities provided the basis for general acceptability:  For instance, corn, salt, tobacco, or cloth were widely used because they had obvious value themselves.  These could be regarded as commodity money.

Commodity money had uses other than as a medium of exchange (e.g. salt could be used to preserve meat, as well as in exchange).  But money commodities were not particularly convenient to use as money.  Some were difficult to transport, some deteriorated overtime, some could not be easily divided and some were valued differently by different cultures.

As the trade developed between different cultures, many chose precious metal's mainly gold or silver as their commodity money.  These had the advantage of being easily recognizable, portable, indestructible and scarce (which meant it preserved its value over time).

The value of the metal was in terms of weight.  Thus each time a transaction was made, the metal was weighed and payment made.  Due to the inconvenience of weighing each time a transaction was made, this led to the development of coin money.  The state took over the minting of coins by stamping each as being a particular weight and purity (e.g. one pound of silver).  They were later given a rough edge so that people could guard against being cheated by an unscrupulous trade filling the edge down.

It became readily apparent, however, that what was important was public confidence in the "currency" of money, it's ability to run from hand to hand and circulate freely, rather than its intrinsic value.  As a result there was deliberately reduced below the face value of the coinage.

Any person receiving such a coin could afford not to mind, so long as he was confident that anyone to whom he passed on the coin would also  "not mind".  Debasement represents an early form of fiduciary issue, i.e. issuing of money dependent on the  "faith of the public" and was resorted to because it permitted the extension of the supply of money beyond the availability of gold and silver.


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