The Evolution of Money and the Payments System
Our payments system has evolved over a period of centuries, and with it the nature and use of money. Very early, metallic coins circulated as money in numerous civilizations. Later, such coins were heavily supplemented with more convenient paper currency. Still later, the use of checks made it possible to pay for goods and services by transferring checking account balances in depository institutions. Today, our payments system continues to evolve. We are now moving toward supplementing our paper-onented system with an electronic funds transfer system (EFTS).
In the following sections, we will trace the evolution of our payments system, beginning with the earliest coins.
In ancient civilizations, certain substances that were attractive, durable, divisible, and available in relatively small quantities naturally emerged as money, becoming w idely used as media of exchange. Because of their ornamental qualities, durability, and convenient size, metallic substances such as bronze, iron, and copper emerged as money thousands of years ago. These early monies were full-bodied monies, or commodity monies: money whose value is the same whether used in exchange for goods and services (as money) or for nonmoney purposes (as a commodity). This approximate equality of value was ensured by the forces of supply and demand. If gold coins w ere initially w orth more for their metallic content than as money, they would disappear from circulation and be melted down, to be used for nonmoney purposes. In time, this reallocation of use would tend to reduce gold’s value as a commodity and increase its value as money, until the two values were equal Conversely, if gold coins were initially worth more as money than as a commodity, gold would be withdrawn from industrial use and sold for use as coins. Thus, the forces of supply and demand ensured that the value of gold as money never deviated markedly from its value as a commodity. The fact that money had an alternative use as a commodity inspired confidence in coins and ensured their acceptability as media of exchange.
Metallic coins came to be widely used in ancient civilizations. At first, iron and copper predominated. However, major increases in their supply reduced the value of a given amount of the metals to the point w’here payTnent with coins became inconvenient because they were too heavy. Because silver was more scarce, it became popular as money. Until a couple of hundred years ago, gold was so scarce that it could not effectively serve as money; gold coins would have been too small. However, major worldwide gold discoveries in the nineteenth century’ sufficiently increased supplies to permit the use of gold coins of convenient size.