The Evolution of Currency: From Barter to Digital Transactions

The Evolution of Money: From Barter to Digital Currency

What is Money?

It's easy to think of money as dollar bills and quarters, but money is anything that most people can agree upon as a means of exchange. If enough people in town are willing to accept donuts as money, then donuts are money—at least for people in that city. One might, however, run into trouble when trying to spend those donuts in other cities.

Barter: The Original Exchange System

Before coins or banknotes, people exchanged fish for stone tools or leather goods for wood. This method of exchanging one thing for another is called barter. It remains in use today: Sue could agree to fix Ramon's electrical wiring if Ramon prepares Sue's income tax figures. They have exchanged services, not goods, but have still bartered.

Barter vs. Money: Key Differences

The difference between barter and money lies in the situation. While money can be used in most situations, in a barter exchange, each individual needs something the other person needs or wants. Sue and Ramon may agree to exchange electrical work for accounting, but Harold, another accountant, could insist on being paid in dollars and cents. Harold might not need any electrical work done, and he can spend U.S. dollars anywhere.

Money Through History

The Rise of Coins

Money in the form of coins has been around since approximately 600 BC. When Greek and Roman civilizations, dominant economies of their time, began to accept coins as money, most of the rest of the world followed suit. Coins are still accepted today, though usually as a fraction of banknotes (e.g., one quarter is a quarter of a dollar).

The Advent of Banknotes

The first banknotes were issued in China in the thirteenth century. The concept gained traction in the West approximately 400 years later. The paper dollar appeared in the United States after the Revolutionary War and slowly became the national standard of value.

Modern Forms of Money

The most common forms of money today, including checks, money orders, certificates, and government bonds, are based on the dollar. Going back to our definition, we can say that the dollar is money because a majority of people in the country (and even the world) accept it as a means of exchange. In historical terms, the dollar is a relatively new form of money, yet it is accepted almost everywhere in the world.

The Era of Electronic Money

An even newer form of money is electronic money. With the extensive use of computers today, a great many monetary transactions are electronic. No physical money changes hands; instead, what were once physical dollars and cents are now represented by bits and bytes. The standard hasn't changed, just the method of exchange.