We know about barter system and its demerits. The barter system had such a problems that they could be removed only by inventing money. Therefore, the importance of money can be judged from the followings:
(i) It has put to an end the demerits of barter system.
(ii) The-scope of money is extended over to consumption, production, distribution and public finance. Money is much helpful for consumers and producers; and it has facilitated the process of distribution and exchange.
(iii) The price mechanism runs on the basis of money. As a labor works for wages and producer for profits. The wages or the profits are expressed in the form of money.
(iv) According to Keynes it is the money which can influence the level of income and employment. While the classical considered it just a medium of exchange. Now we discuss it in detail.
(i) Money and the Consumers:
Under barter system the consumers have to be contended with the limited goods because the direct exchange of goods could encompass only a few goods. As a result, most of the desires of the consumers remained unsatisfied. But with the invention of money, the consumers could be able to purchase those goods which they like. Moreover, as the money is divisible into smaller units, it can be employed to purchase the smaller quantities of the commodities. In this way, consumers can maximize their satisfaction in a better way. As a consumer has limited money income; thus it is the money which provides the capacity to consumers to allocate their incomes in most rational way. It is the money which not only diversifies consumer desires, but it also-extends market and creates jobs for the people. As Robertson in his book ‘Money’ writes:
“With the help of money in an economy one can see what do people want and in how much quantity they want. This helps in deciding of what is to be produced, how much to be produced and how the scarce resource of the economy be optionally utilized”.
The free enterprises economy runs on the basis of price mechanism. While the price mechanism runs on the basis of money. As under market economy a consumer expresses his desires, through price and price is the monetary representation of value.
In addition to role of money as a medium of exchange, one can also observe the role of money as a store of value and measure of value for consumers. As in the monetary system with money the values of commodities can be estimated. A. person as a consumer can decide, in the presence of money, how much he should spend and how much he should save. The savings in a monetary system are made in the form of money. Again the investment is also made in the form of money. If the interest or profit is earned, they are also in the form of money.
(ii) Money and the Producers:
As told above that free enterprise economies run on the basis of price mechanism. While price mechanism works on the ground of money. It means that all the production activities of market economics are carried through money. All is discussed below:
(a) Whenever any entrepreneur plans to invest in any project he estimates the return or profit from such project, and the interest which he will have to pay against the borrowed funds. If profit is more than the interest investment will be made and vice versa. The profit and interest both are expressed in money. It means that the investment and other activities relating to production are carried on the basis of money.
(b) It is the money which has facilitated to produce the goods on large scale in the capitalist economies. It is the money which has encouraged division of labor and specialization. The modern and round about methods of production are also attributed to money. Thus all the inconveniences which could be faced by a producer in the barter system have been put to an end by the invention of money. The goods can be sold against money and what inputs arc required by the producers could be purchased against money. It means that the modern economy runs on the basis of costs, revenues, profits and taxes etc., and they all are expressed in money. Moreover, when the economic activity expands the need for finance rises which could be met through loans the loans are also represented through Money. Had there been not the money, how the loans would have been obtained. All this would hamper the industrial growth – the main source of employment and economic growth. As Prof. Molton in his book “The Financial Organization of Society” writes:
“To start the process of production money is a basic and inevitable factor of production. The producers have to use money in order to start their business and run their factories. The inputs as well as labor are purchased with the help of money”.
(c) Under price mechanism, all the activities regarding production are performed on the basis of money. What is to be produced; how much to be produced; labor intensive techniques be followed or capital intensive
techniques, all such decisions are made through profit motive. The profit is just the difference between the revenues and costs. It means that production, techniques of production and quantity of production like activities are performed on the basis of costs and profits. The costs and profits are expressed in money.
(iii) Money and Advance Payments:
Under barter system there was no concept of advance payments. But in money system the advance payment system can be practicable. When any producer starts the process of production he has to make the advance payments. They consist of wages to labor, purchase of land and purchase of raw material. Again the loan transactions also take place in advance.
Thus all such is possible because of money. The public and private savings are also made in the form of money. All this shows that savings, investment, private and public borrowing, public and private financing, all is possible on the wheels of money.
(iv) Money and Social and Economic Change:
Under barter system the villages were self-sufficient, the desires were limited; and people were backward from social and economic point of view. It is the money which laid the foundations of social and economic change. The narrower life of villages came to an end; the industrialization started; the mobility of labor increased because the incentive to earn money emerged amongst laboring class; and the new techniques and inventions were made possible because of money. As Prof. Marshall says:
“The development of free enterprise system is entirely based upon growth of monetary economy”.
As Prof. Devonport in his book “Economics of Enterprise” writes:
“All economic comparisons are made in money, not in beauty. Whether any one is an artist, a professor a lawyer, a physician or a surgeon all would be depending upon their earnings in the form of money. It means that all the economic, social, political and ethical activities of capitalistic countries run on the basis of money”.