Before money was invented, communities exchanged some goods with each other in order to meet their needs. People used to trade with a barter system in those ancient times. For the exchange to take place, one had to find a person with the product he wanted and the person he found needed to part with it. For example, a person who wanted a monk had to exchange their cattle with another monk seller in exchange for cattle. Due to the low population in the past and the low supply and demand issue, this trade was not easily achieved. People had to trade by visiting many regions at the cost of reaching what they wanted.
This was not the only problem. People also had problems with valuing their products. People were trying to give a common value to the needs they wanted to trade. For example, let’s say that there was a trader who claimed that 1 kilo of oranges was worth 3 buckets of milk, while there was another trader saying that 1 kilo of orange was only worth 1 bucket of milk.
For this reason, people were trading with approximate values, not net values. Also, there was no situation like stocking products. People with products that can spoil very quickly, such as milk, meat and eggs, had to replace these products with other products as soon as possible. Due to the difficulties of bartering, goods were started to be valued differently in every region. Mussel shells, salt, fabric and many kinds of goods were used like money we know today. The value of these goods was determined by major communities. Among all the products counted as tools of value, metals were considered the most attractive choice.
Rare metals in nature could be split into smaller pieces, as they were shaped easily. Instead of giving an approximate value to products by dividing metals into small pieces, the problems in the bartering system began to improve as the value corresponding to the product was determined. However, merchants paying with metals had to weigh these metals. To get rid of this complexity, metals predetermined in weight were converted into a metal currency. Hereby, coins were created.
The process of accepting a currency
Money is an economically vital factor in our time. It is one of the indispensable parts of the economy. In every economic transaction, money is included in cash or virtually.
There are three factors in the process of evaluating an asset as money (Milnes, 1919, p.55):
Usability as an exchange tool: The money is given to seller from buyer in exchange for a product / service purchase.
Measurablity: The value of money can be measured in standard numerical unit in terms of market value in products, services or other transactions.
Store of value: It is the ability to use money as a saving tool due to its constant value.
However, not all assets are suitable for being a medium of exchange. For example, real estate is considered a store of value; however, it is not used as a means of exchange. In order for an asset to be counted as a tool of exchange, it has to have a store of value.
Money has been traded in different forms throughout the ages; accordingly, the methods of transactions with monetary values in the economy have also changed over time. Considering the development process of money, the oldest type of money that can be perceived in today’s conditions is known as commodity money. Commodity money is a type of money that takes its value from the substance on which it is made. After the economy in the emergence of money was left behind, commodity coins started to take place in many economies around the world. Looking at examples from the early ages, precious metals like gold and silver are among the most well-known forms of commodity money. The values of commodity coins come first from their weight and purity, and then from their ability to be used as money. (O’Sullivan and Sheffrini, 2003).
As a store of value: Gold
Since 700 BC, gold has been used as a store of value, an exchange tool and a unit of measure. The property of gold as a unit of value comes from the fact that it has real value. Although gold has value, this is not enough to use it as money. Many products have a value in themselves, but these are not enough to use the products as money. In comparison with mussel shell, gold is much more durable. In addition, the value of gold is parallel to its supply in the world.
Looking at the supply levels of Platinum and Aluminum, there are too little or too much supply levels. The fine detail between gold and other stores of value comes through here. On the other hand, Gold is a mineral that can be measured and divided simply. Over time, the use of precious metals as money has lost its importance by communities and precious metals have been converted into banknotes and have gained value as money.
Gold could not adapt to changes
The gold standard monetary system, which was implemented in order to associate the value of money with precious metals such as gold and silver, and limit the money supply to the gold reserves in governments, collapsed with great difficulties in the 1900s. One of the main factors in the realization of these troubles is the economic effects of the world wars. For these reasons, the gold reserves in the world could not adapt to the great economic change the world has undergone. The gold standard monetary system was left behind after silver caused constant problems in the domestic market by creating an imbalance. Instead of this system, the Bretton Woods era, a system in which only the US dollar was indexed to gold and the other currencies of the world to the USD, started at the United Nations Conference on Money and Finance in July 1944. (Eğilmez, 2013)
As a result, a new era began and the use of paper money was started to be used in many economies. The reputation of the monetary value comes from the belief in the central system. People believing that the central bank or central authority in the country in which they are citizens will not increase the money supply suddenly or lose the value of this currency increases commitment. Today, the value of money progresses in parallel with the monetary policies of the relevant institutions in countries.
Since technology became part of our lives, financial markets have become more and more technologically advanced. Monetary transactions and records of ownership held in the past physical ledger are now available electronically. The fact that money is available in electronic form rather than cash nowadays is the reason for preference in today’s economy world. The developments of technology in finance led to the idea of transforming the financial services sector. Due to the fact that physical money is less preferred in the world today, virtual currencies have emerged and play an active role in many payment systems.