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
(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
(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
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
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
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
(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
"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
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".