The importance of money flows from it being a link between the present and the future.

—  John Maynard Keynes 20th century economist

The Big Questions?

1. How did exchange take place before money? 

2. Why did money come into existence? 

3. How has money transformed into various forms over time?

In the theme “Tapestry of the Past”, you read about the crops that people grew, such as food grains or goods they made like carnelian beads. How do you think they exchanged these goods for things that they needed?

People exchanged goods or services for other goods and services. This system is called the barter system. How did this work? Suppose you need a pencil and have an extra eraser. Meanwhile, your classmate forgot to bring their eraser but has an extra pencil. You could exchange your extra eraser for the extra pencil that your classmate has. Wouldn’t this satisfy your and the classmate’s needs? This is how the barter system works.

Today, we use coins and notes to buy and sell things. People also use their mobile phones and computers for such transactions.

The barter system was the earliest form of exchange. There is a lot of evidence of it from around the world. People used commodities such as cowrie shells, salt, tea, tobacco, cloth, cattle (cows, goats, horses, sheep), seeds, etc.

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Imagine that you are a farmer and that people use a barter system where you live. You need a whole variety of things — a pair of new shoes, a sweater, and medicines for your grandmother. But you only have an ox that you can spare. How would you be able to exchange the ox for all the different things you need from different people or places? What difficulties are you likely to face?

For one, you would have to find someone who needed an ox. Now, swapping your ox for a pair of shoes would hardly be a fair exchange! You may have had to go through a series of exchanges — for example, find someone to exchange your ox for several bags of wheat. You would then have to transport all that wheat to several places; first, find someone willing to exchange a part of the wheat for shoes, another person for the sweater, and yet another for the medicines.

In each of these cases, a discussion would take place to arrive at the fair amount of wheat that you could exchange for shoes or for the sweater.

You would have to take the leftover bags of wheat and find a place to store them safely. The next time you needed something, you would have to carry the bags of wheat with you again!

THINK ABOUT IT

In the farmer’s story, imagine he finds someone who is willing to trade a pair of new shoes, a sweater, and 233 Economic Life Around Us 11 – From Barter to Money medicines — all in exchange for his ox. Do you think it would be easy to come across such a situation?

Just like the farmer, people who depended on the barter system would face many problems in making an exchange in their everyday lives. They would have to find someone who wants the exact item that they want to give, and in return are also able to offer exactly what the other party wants. This scenario is called double coincidence of wants.

Even if there are two people who want each other’s goods and are also willing to make an exchange, other issues could arise — in what proportion should the two goods be exchanged? In such cases, it becomes difficult to compare the value of one good against another. If one of the people feels that the exchange is disadvantageous, they would not be interested in the exchange. This is because there is no common standard measure of value.

THINK ABOUT IT

Similarly, you cannot exchange only a part of the ox for a sweater; this is the problem of divisibility. Taking the ox everywhere is a problem and leads to the problem of portability. You solved part of the problem by exchanging the ox for bags of wheat, but you cannot store the wheat for long; it would rot or get eaten by rats! Thus arises the problem of durability.

THINK ABOUT IT

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Although money has replaced traditional barter systems all around the world, there are some that still exist today! One of them is the Junbeel Mela (jun means moon in Assamese and beel means wetland), a three- day annual socio-cultural fair at Junbeel in Morigaon district of Assam. Interestingly, the mela begins with the Agni Puja or worship of fire, a prayer for universal wellbeing.

Beginning in the 15th century, the chiefs of the Tiwa, Karbi, Khasi, and Jaintia tribal communities of Assam and Meghalaya would gather every year to discuss political issues and to maintain friendly relationships. Members of these communities began to gather around this event and soon it turned into a fair, where people would bring their produce and began exchanging them among each other.

This continues to be an important socio-cultural event even today. Bartering begins early in the morning, with the trade of local products such as roots, vegetables, fruit, herbs, and spices. Also seen at the fair are handmade goods and artifacts, made from natural materials sourced from the forests of the hilly region. These are often exchanged with people from the plains for rice cakes, and other types of food that cannot be grown in the hills.

• Book exchange: Think of a fun club where you can trade your old books with friends! It’s like a treasure hunt for stories. You bring books you’ve read and pick new ones from a big collection. For example, you might swap your exciting jungle adventure book for a friend’s mystery story. It’s a cool way to discover new adventures without spending any money!

• One common example is the exchange of old clothes for new utensils, a practice that has persisted over the years. In this system, a vendor visits homes, offering households new utensils or other household items in return for their used clothes or fabrics. This exchange benefits both parties—households get rid of items they no longer need, while vendors collect materials that can be resold, repurposed, or recycled.

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Basic Functions of Money

It is said that “necessity is the mother of invention.” As the types and numbers of things that were being exchanged grew, and the distances across which barter was beginning to take place became longer, it became clear that there was a need for a different system. A common medium of exchange would make trade easier and so, money came into existence. As more and more people began to use it for transactions — buying and selling goods and services — it became the accepted method of payment.

As we saw in the farmer’s story above, he could not store the wheat for long as it would rot or get eaten by rats.

If the farmer uses money instead of wheat as a medium of exchange, he can keep the money for a longer time and use it for making purchases later. So, money acts as a store of value that can be used later. Isn’t it fascinating!

Money also serves as a common denomination that measures the value of goods and services, and enables the comparison of goods and services in terms of their prices.

For example, your parents pay money to the shopkeepers in exchange for various products. This money is used by the shopkeepers to pay salaries to their workers. The workers use the same medium to buy everyday essentials and other goods, pay their children’s school fees, etc.

THINK ABOUT IT

The fact that money is accepted as a way of making deferred payments makes money a standard of deferred payment.

The Journey of Money

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Coinage

As you can see from the timeline, coins were among the earliest forms of money. During those times, rulers would issue coins that were used by the citizens of their respective kingdoms for transactions. So different kingdoms would have their own coinage. The minting and issue of coins was controlled entirely by the rulers. Over time, the coins of powerful rulers were accepted across various kingdoms and not just their own. This facilitated trade across geographies.

The coins were made from precious metals like gold, silver, and copper or their alloys. They were called kārṣhāpaṇas or paṇas. They had symbols punched on them called rūpas.

Fig. 11.10. Evolution of money in India - a broad timeline

Does this word sound familiar to a word we use for money today in India?

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In ancient times, the two sides of the coins — the head (obverse) and the tail (reverse) — had different kinds of symbols and motifs engraved on them. These included nature motifs like animals, trees and hills, and those of kings or queens, and deities.

For example, the coins of the Chalukyas had a Varaha image (avatar of Viṣhṇu) on one side and decorated three-tiered parasol on the other.

Fig. 11.11.

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Fig. 11.12. Roman gold coins excavated in Pudukottai India

The use of coinage helped boost India’s maritime trade with the world. For example, they were found in parts of Kerala and Tamil Nadu. This throws light on the trading activities of southern India with the rest of the world. Based on this finding, scholars conclude that the trade was in favour of India.

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1 anna was equal to 1 / 16 of a rupee! In 1947, one anna could buy a dozen bananas.

Fig. 11.13.

Today, we see coins of different sizes (shown below) for various denominations with both Hindi and English used on each coin. Special coins are also minted to mark important events for the nation.

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The ₹ sign was adopted by the Government of India in 2010. It was designed by Udaya Kumar from the Indian Institute of Technology, Bombay (Mumbai). The symbol is a mix of the Devanagari “Ra” and the Roman “R” with two parallel horizontal stripes running at the top representing the national flag and also the “equal to” sign.

Fig. 11.14.

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While the barter system used non-metallic money as discussed above, coinage, that is metallic money, gave way to other forms of money!

Paper Money

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As you may have imagined, it became difficult to carry a large number of coins. Storing the coins also became a problem. The search for a more suitable alternative ended with the use of paper money. Paper money or currency was first used in China and was introduced in India in the late 18th century.

Fig. 11.15. Uniface notes of Bank of Bengal (Left) and Ten rupee note from Bank of Bombay (Source:RBI)

While coins are used for smaller denominations, paper currency is used for higher denominations.

Today, most of the currency notes you see look like this …

Fig. 11.16. Paper currency today

LET'S EXPLORE

Look at a 50 and a 100-rupee note. Can you identify the motifs depicting India’s cultural heritage on the reverse side of the notes? Find out more about them.

⇒ Feel the surface of the notes. What special features of currency notes help visually impaired persons to identify the notes’ denominations?

Fig. 11.17.

Earlier in this chapter, we read that in ancient times coins were issued by rulers. Today, in India, we have a central authority called the Reserve Bank of India (RBI) that controls the issue of currency. It is not legal for anybody other than the RBI to issue currency.

New Forms of Money

As time has progressed and technology has advanced, other forms of money have come to be used today. Let’s look at some of them.

Krishnappa sells seasonal fruit on a cart. Alongside the colourful fruit that he arranges neatly on his cart is a little card with a QR code. His customers scan the QR code with their mobile phones and pay for their purchase digitally. The payment then goes directly into Krishnappa’s bank account.

Fig. 11.18.

Apart from tangible forms of money such as coins and paper notes, money has taken intangible forms that we cannot touch and feel. This is called digital money which is in electronic form. Have you observed other people around you making or receiving payments without using coins and notes? Different payment methods like debit cards, credit cards, net banking, UPI (Unified Payments Interface), etc., are also used for transactions. These mediums directly transfer money from one person’s bank account into another. You will learn more about the modern methods of monetary transactions later.

Before we move on ...

→ The barter system existed before money came into existence. A variety of commodities were used to facilitate exchange.

→ The limitations of the barter system led to the development of money as a medium of exchange.

→ Forms of money evolved through time, such as shells, coins, and paper currency. This evolution continues as we create new and easier ways to make and receive payments, including the QR code that you saw in the illustration above.