People had some mutual requirements and started to exchange commodities. Two people exchange some quantities of wheat and rice as they wish to eat both. If they decide that the demand for rice is double that of wheat, they will come to an agreement that for every two Kgs of wheat, one Kg of rice will be given. This is what is called Barter System
Later, people had difficulty with the Barter System, because Barter system gets complicated with increasing number of entities. Some of the problems are that not all commodities can be physically carried and then exchanged, and if a person wants oil he has to look for a person who has oil and needs wheat. Now, these problems complicated the matters for people to exchange (trade). As we say necessity is the mother of invention, people started to identify certain valuable items which are equally demanding across for most people and which are very portable. People started to accept certain types of mineral rocks, fish bones, sea shells, and whale tooth. Now, slowly this led to gems, and jewels. and then to Gold, Silver and other metals. These metals can be melted and can be transformed into whatever you want. So, people started trading in thesemetals and that led to Gold Based System.
But metal money also has a set of disadvantages. People had problems in assessing the purity of the metal, metals wear down and lose value, coins have to periodically be reminted and returned to the original weight, heavy for large transactions, prone to robbery, and metal is limited in the nature. During this time, many temples and goldsmiths who had place to store gold, started a business to store people’s gold. People stored gold in exchange of a claim check. If one deposits a one-ounce gold, one gets a one-ounce claim check. People started to deposit their gold here and used the claim checks as money. People found that it has the same value as the gold they’ve deposited and they can claim anytime they want. All these papers are redeemable and they have the same value. This laid the foundation for the paper currency.
Gold is still considered as ‘the real money’
Gold is an element that comes in only one form and doesn’t combine with other elements. It doesn’t tarnish or rust, and can be melted to make foils out of lumps and lumps out foils. It is extraordinarily dense and cannot be counterfeited as all other metals are not that dense.
Gold doesn’t have many uses except for some uses in electronics and dentistry. Silver, Copper, and Bronze are used in many industries. As a result, Gold is hardly consumed or changed from one form to another. Of the 125 million kilograms of Gold found till now, humans own close to 100 kilograms of Gold and very less is used for other purposes. Even till date, people perceive Gold as the real money. India is one of the largest markets for Gold and much of the demand for Gold in India is satisfied from the imports.