Understanding Money: Origins, Evolution, and Functions

Primitive societies used barter as a form of exchange. As trade expanded, the need arose to identify objects or agreements to facilitate trade and account for the value of goods. Cereals, salt, shells, seeds, cocoa, and other items were used as money in different cultures over the centuries.

Evolution of Money

To be practical, items used as money should be easily transportable, divisible, storable, and non-perishable. These features eventually led to the use of metals as a means of payment. The first coins appeared in Greece in the late 7th century BC, and the drachma was the most widespread currency in ancient times for centuries. The subsequent use of paper money dates back to China in the 9th and 10th centuries and is closely linked to the development of banking, which allowed the creation of bills and notes as payment.

In the 17th century, banks started to issue their own tickets, committed to exchanging them for the equivalent in gold or precious metals. States realized banks could issue more paper money than their metal deposits, leading to the nationalization of banks and the birth of central banks. This resulted in the widespread use of banknotes for payment and collection.

Modern Money

Today, all countries have a national bank, called the central bank. Central banks no longer undertake to exchange banknotes for their equivalent in gold. Money is not convertible; its use is based on the confidence that it will be accepted as payment. This is known as fiat money.

Types of Money

There are two main types of money:

1. Legal Money: Funds issued by an institution with a monopoly on issuance, usually in the form of banknotes or coins.
2. Deposit Money: Money generated by deposits in banks.

Categories of Deposit Money:

• Demand Deposits: Immediately available funds, such as checking accounts.
• Savings Deposits: Funds held in savings accounts, where checks are not accepted.
• Time Deposits: Fixed-term funds.

Functions of Money

The primary functions of money are:

1. Medium of Exchange: Accepted as a means of payment.
2. Unit of Account: A standard measure of value.
3. Store of Value: A financial asset that retains its value over time.