The Evolution in the Value of Money

Introduction

Money has existed for thousands of years, and its value, management, and production have been increasing in intensity and complexity. In the last few centuries, money has become the primary medium of exchange in economic transactions. Its value has evolved from aiding business transactions to the central controller of business. This paper explores the evolution of the importance of money throughout human history up to the present.

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History of Money

Ancient communities utilized the barter system for trading, and the use of money only started in 3000 B.C. The first kind of money was commodity money, which included Mesopotamia shekel and Chinese shell money (Angeles, 2020). China has had one of the most diverse histories of money globally. After the invention of shell money, Chinese empires began using various bronze shells from 500 BC (Ma, 2012). In 200BC, China adopted copper coins followed by paper money in the 9th century. In the 13th century, the Yuan dynasty introduced the Yuan currency that lasted a short duration due to high inflation.

From the 13th century to the 20th century, various regions of China used the Yuan and other currencies with mixed successes (Ma, 2012). In the early 20th century, China introduced the silver dollar and later the Fabi in 1935. The gold Yuan and the Renminbi followed in 1948, the silver yuan in 1949, and the Taiwan dollar in 2000 (Ma, 2012). Currently, the Renminbi is the official currency, and its basic unit is called Yuan. China has had different currencies in its history due to frequent inflations and the Japanese invasion (Ma, 2012). In 2019, China announced an intention to release a digital version of the Renminbi to promote cashless payments.

The use of gold and silver coins began around 600 BC. With the rise of commercial banks in Europe in the 14th century, representative money began to replace commodity money (Angeles, 2020). Representative money emerged as bank depositors began to use deposit slips for payments. The use of paper notes began in Europe in the 17th century, and countries started basing currency value on fixed quantities of gold (Ma, 2012).

In the mid 20th century, world nations adopted the U.S. dollar as the base for their currencies, while the USA based the dollar on a fixed quantity of gold. However, current account deficits and the rise of eurocurrency led to the abandonment of this arrangement and a shift to floating rates. In a system of floating rates, currencies do not have any backing. Currency values depend on market forces and government monetary policies. The history of money reveals that it is an invention of governments that wanted to ease transactions and provide a standardized way of collecting taxes.

Characteristics of Money

The invention of money followed the need to simplify economic transactions. Its nature always reflects the prevailing aspects of an economy, whether it is shells, coins, paper, or digital forms. Throughout history, money has had enduring characteristics. The usability of money depends on its fungibility, which means that the units of money have uniform quality and are interchangeable with each other. Interchangeability increases reliability and consistency in trading.

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Money should have physical durability to retain its usefulness for extended periods. It should be portable to allow the transportation of large quantities of the same during transactions. Money should be recognizable. It should have an authentic quality that is ascertainable for ease of transacting processes. Money should have stability in value to enable people to use it for placing prices on goods and services

Types of Money

Money has evolved from a commodity form to fiat, fiduciary, and commercial bank money forms. Commodity money was the oldest type. Its value depended on the intrinsic value of the commodity (Orrell & Chlupatý, 2016). Forms of commodity money included gold coins and shells. The second type is fiat money that gets worth from government orders. Once a government declares it as legal tender, people are bound to use it for transactions. It has a high face value than intrinsic value. The face value depends on the forces of supply and demand. Examples of fiat money include coins and bills.

The third type is fiduciary money, whose worth depends on people’s confidence (Orrell & Chlupatý, 2016). A person issues fiduciary money to another on the promise of exchanging it for a commodity or fiat money on request. People use it due to the assurance made by the issuing party. Examples include banknotes, cheques, and drafts. The fourth type is commercial bank money that consists of claims against financial institutions that people can use to pay for goods and services. It arises out of debt that banks generate when they give more loans than the cash at hand. A holder of the claim can then exchange the money with fiat money to pay for goods and services.

The consistency of Money

Since the innovation of money, its functions have not changed. It still serves four purposes. As a medium of exchange for paying for goods, services, or assets. As a unit of account, it places a price on products, services, or assets (Cohn, 2016). As a store of value, it helps to preserve the purchasing power, wealth, and foreign exchange reserves (Cohn, 2016). It is a store of value because it retains value over extended periods. It is a tool for saving purchasing power from the time a person receives it to the time of spending. Money is a standard of deferred payment. It allows people to borrow and lend efficiently without the necessity for instant repayments. Governments give legitimacy to the use of money by producing and regulating use. Without government support, money would quickly lose its functions, and people would default to nonmonetary forms of trading or create local currencies with minimal functions

Valuation of Money

The value of money depends on the number of goods or services a person can acquire with a unit of money. In ancient times, people only used money for limited functions. It served as an aid to business rather than the medium of transaction. However, as governments began to mainstream the usage, its value increased. Money became comparable to every other physical asset. In the 21st century, money has become the dominant medium of exchange.

It is an economic resource that has supply, demand, and scarcity. Individuals, organizations, and nations are increasingly focusing on getting the best value for their money. Orrell and Chlupatý (2016) explain that money has the power to give an equal proportion to all things because it is the standard measure. It translates physical items into numbers enabling quick reference and comparison. The emphasis on value has led to the growth of the concept of value for money.

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Value for Money

Value for money is a style of thinking that seeks the best use of resources. It involves acquiring a balance between economy, efficiency, effectiveness, and equity (Jackson, 2012). It is also a framework for checking cost-effectiveness in procurement and public projects. The term economy refers to reducing the cost of activity while maintaining its quality, and efficiency is maximizing output from a specific input while sustaining the quality.

Effectiveness means achieving desired outcomes from an operation, and equity is sharing benefits equally. International organizations such as the World Bank, the United States Agency for International Development, and other organizations usually emphasize value for money when funding projects. In development, the concept of value for money provides a basis for estimating returns on investments and guiding improvements in project management. The idea serves as a tool for determining whether a monetary intervention offers the best value for the money. There are various methods for assessing the worth of money.

One is Cost-effectiveness analysis. The technique evaluates alternatives based on the costs and outcomes for a particular goal (Fleming, 2013). It is useful for comparing similar programs. The cost-utility analysis evaluates alternatives by measuring costs and value. It is most appropriate where monetizing outcomes appear inappropriate or impossible such as in healthcare (Fleming 2013). For example, the use of quality-adjusted life years to measure how medications extend life.

Cost-benefit analysis for evaluating alternatives by checking the monetary costs and benefits of each. The technique determines whether costs outweigh benefits in pursuing a particular decision(Fleming 2013). It is useful for comparing unrelated alternatives. Rank correlation of cost vs. impact, helpful in measuring value for money across a cluster of initiatives. Basic Efficiency Resource Analysis, which provides a framework for checking sophisticated alternatives by comparing the impact on resources and offers insights on the performance of related units (Fleming 2013).

Social Return on Investment, which evaluates the social, environmental, and economic costs and benefits of an initiative. It is also suitable for comparing unrelated programs. All the different methods require the collection of accurate data and collaboration between various stakeholders. While the concept of value for money is more prevalent in corporate circles, individuals frequently utilize it in budgeting, purchases, and making life decisions.

The importance of money in the 21st century is evident in all societies. The world places value on all things based on money, whether it’s education, healthcare, food, clothing, or traveling. All of the world’s processes require an investment of money to support life. As a result, money has become a central thing in modern life. It offers freedom and choices to decide where and how to live. Lack of funds limits individual decisions. In the past centuries and millennia, people only used money in significant transactions such as buying land. Currently, it is almost impossible to survive in an urban center without money.

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Its relative importance has been increasing in the past. In the future, money will continue to play a more prominent role as people move to urban areas. Semenova (2020), argues that money promotes inequalities in society by concentrating wealth in the financial sector. The wealthy can manage their assets in the form of money without the need for substantial salary expenses. Therefore, many people do not get the jobs they would in ancient work settings.

The Future of Money

History shows that the forms of money evolve with advances in economic structures and technological advances. As society advances, the value of money increases. Emerging types of money have increasing value compared to the past (OECD, 2002). The emerging kind of money, cryptocurrencies have a high worth in comparison to existing currencies.

Conclusion

The importance of money has been increasing throughout history. Since its inception in around 3000 BC, money has been gaining different forms, from simple commodities such as shells to paper and digital forms presently. While the ancient types of money had intrinsic value, the present models of money bear a face value that has no relationship with the inherent value of the material. As money has been gaining relevance, it has been losing its intrinsic value.

In the 21st century, money has become a medium of exchange with a high face value, central importance in life, and zero inherent value. The future presents virtual forms of money that are intangible but bear higher worth than any type of the past. The next phase of society’s advancement includes the emphasis on intangibility as an aspect of value in assets. Therefore, we should expect that money will take on intangible features to retain relevance.

The rising relevance of virtual money is a public initiative to evade high transaction charges that reduce the value of the present forms of money. The use of virtue money is also a strategy of lowering government control and the associated taxation regimes that reduce the power of money held by an individual. However, the removal of government controls will lead to frequent variations in the worth of virtual money, as present cryptocurrencies indicate.

References

Angeles, L. (2020). Four Phases in the History of Money. Web.

Cohn, T. (2016). Global Political Economy: Theory and Practice (7th ed.). Routledge.

Fleming, F. (2013). Evaluation methods for assessing Value for Money. Web.

Jackson, P. (2012). Value for money and international development: Deconstructing myths to promote a more constructive discussion. Web.

Ma, D. (2012). Money and monetary system in China in the 19th-20th century: An overview. London School of Economics and Political Science.

OECD. (2002). The Future of Money. OECD Publications Service.

Orrell, D., & Chlupatý, R. (2016). The evolution of money. Columbia University Press.

Semenova, A. (2020). The Rise of Money and Class Society: The Contributions of John F. Henry . Web.

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