Origin of Money, Banks and Currency Notes

Note: All the concepts in this blog are my personal interpretation of the knowledge that I gain through various sources and experiences. I am not an economist, accountant or finance guru.

What is Money?

Money is essentially exchange of value and good, but we all know that… what does it actually mean?

Suppose you have 1KG of Wheat and I have 500 grams of sugar, we both agree on the exchange. I bring 500 grams of sugar from my house to sell you and you give me 1KG of wheat, or maybe we both agree on a spot to exchange… who knows.

The point is we are exchanged goods for goods. While this seems practical and even happens today but has a scalability issue.

Let’s say I wanted to establish a garage with 5 mechanics, what will I use to buy that land and construct up the place? Surely I can’t have 100s of kg of sugar and what if the guy actually doesn’t want to get that much sugar?

Surely I can do the trade like give my motorcycle + 4 buffalo + 1 years of produce from the banana trees in my farmhouse… but there is only one issue:

• I don’t have buffalo
• I don’t have banana trees
• I don’t even have a farm!

And what guarantees that the person even needs that in the first place? And surely there cannot be a well defined standard on what you actually require to setup such things on a large scale.

Conclusion: We need a better way to exchange values.

Here came coins issued by your government, like gold coins, silver coins and other metal.

So now for 40KG of wheat, I only have to give you:

• A single gold coin
• OR a pouch of silver coins (issued by the king)

Now that’s an improvement! 🎉

What is a Bank and Why Do We Need One?

As the economic activities boomed and people started exchanging and creating value beyond their survival needs we needed a safe place to keep those silver, gold coins. Let’s say a few trusted individuals with enough land and manpower to secure the coins take the initiative and get the approval from king to create a safe guarding place for the coins for community.

Well, surely they mustn’t be a charity organization!

Who is paying up for all these:

• Security and guarding?
• Manpower?
• How do they profit?

Let’s say Suresh has recently gotten married and is in need of a house, so instead of saving the money for 5 years. He could go to the bank and loan 500 gold coins from Bank and use it to build the house, as an interest Suresh will pay 100 silver coins to bank every month.

Where would the bank get that coin? It’s the money that account holders deposited (surely it’s very very rare probability that all the account holders at one time would want to get all the money back, in that case the bank would collapse if it has given loan to someone.)

So let’s say for people living in village MahpeNagar we have MahpeNagar Bank.

So now if I wanted to get 40KG of wheat I would go to my bank and get pouch of silver coins from there instead of my house which is less guarded in comparison to bank. I give the pouch to seller and the seller deposits this pouch of silver into his bank account let’s say Sanpada Bank.

Now it’s an improvement from the earlier form of trade we did with all the stuff because it’s a standardized form and measure of value.

But it’s still inconvenient right?

Who wants to:

• Carry that load of silver coins?
• Do to and fro between banks during each purchase?

It’s inconvenient for buyer as well as seller.

Here comes currency note into picture!

Currency Notes

In last section we explored coins. But it’s still inconvenient right? Who wants to carry that load of silver coins and do to and fro between banks during each purchase. It’s inconvenient for buyer as well as seller. Here comes currency note into picture.

Now instead of getting the pouch of coins from the bank to give it to seller, I get a officially stamped paper from the bank which says that I “Aquib” has the sufficient balance to pay you 100 silver coins, is willing to send it to you, whoever you are.

I give this to seller and get my bags of wheat, the seller could then give this paper to his Sanpada bank and MahpeNagar bank and Sanpada bank will manage the transfer to coins internally among themselves. Congrats! 🎊 What you just saw is the earlier and original form of currency notes!

But again, the seller doesn’t want to get the pouch of silver every time he sells anything.

So he stops doing that and instead relies solely further handing out these paper promises that state whoever has this notes is eligible to get the value of 100 silver coins. This paper is not an ordinary paper - it’s a promise that is guaranteed by the bank.

Ever looked at the Indian currency note carefully?

It must have a line that states:

“I promise to pay the bearer the sum of Rupees X”

where X is the currency note you are holding.

Now you know what it means… 💡