1.1 How Money Came into Existence

Do you often wonder why paper notes and coins are given as payment to buy something, say, chocolates, from the local store? We hand over similar notes and coins, buy stationery, book a cab or in a salon. You would certainly know that it is called money, to be a specific currency. But is money always paper notes and coins? The answer is no.

Understanding The Barter System

Back when money was not in existence, people traded by exchanging commodities. This medium is known as the barter system of exchange. This system functioned on the principle of need-to-need matching where one person exchanging a commodity should be required by another person. For example, if you wanted mangoes and had apples, you would have to look for a friend who had mangoes and needed apples at the same time, to exchange.

 

Bartar system of exchange where one commodity is exchanged with another commodity 

But Don’t you think it would be difficult? The barter system had many shortcomings. Eg: What if your friend didn’t need apples at all? You would have to find someone else who needed apples and in return has mangoes to give. This type of exchange was also called the “commodity money”

Another problem associated was How many mangoes should your friend give in exchange of apples You would want six mangoes, but he thinks that six is too less for in exchange of apples. Therefore no standard value was fixed.

 

  Summary of Difficulties of Barter System 

To address these concerns, people started using metallic coins to make payments for the goods and services they needed. Later on, metallic coins were complemented by paper notes, as they were easier to carry. A standardized medium of exchange came into existence. . This form of money is prevalent even today commonly known as “currency money”  Eg we have rs. 10 note, 1 rs coin even 2000 rs note.

Thanks to notes and coins, both you and your friend can enjoy the fruits of your individual choices from the local store!

Illustrations of metal coins, paper notes old and new with wallet

Have you ever exchanged toys or video games with your friends in return of something? When was the last time you purchased a thing from store by giving money?  Now you know what is barter system and what is money exchange.