Role of Money

Topics: Money, Currency, Gold Pages: 8 (3297 words) Published: January 28, 2013
The classical economists were of the view that money was discovered to remove the defects of barter. The important functions of money for them were to serve as a medium of exchange and standard of material. They examined in detail the characteristics of a good money material and the forces which operate in determining the value of money. The classical economists were of the view that the volume of output, the quantity and quality of the goods to be consumed, the volume of exchange, distribution of wealth, rate of saving and investment, etc., are not to be influenced by the use of money. They, therefore, regarded money as neutral. To quote Adam Smith "The gold and silver money which circulates in any one country may very properly be compared to a highway which while it circulates and carries to market all the grass and corn of the country, produces not a single pile of either." In the words of Jevon, "Accustomed from our earliest years to the use of money, we are unconscious of the inestimable benefit which it confers upon us and only when we recur to oblige their different states of society we can realize the difficulties which arise in its absence. Robertson in his book Principles of Money' states "Money enables man as consumer to generalize his purchasing power and make his claims on society in the form which suits him most." The modem economists fully recognize the economic role of money as a medium of exchange and standard of value. They regard it as an economic catalyst. They emphasize that in a capitalistic economy, money exercises a decisive influence on the volume of production, distribution of wealth and income, direction and volume of exchange and on the rate of saving and investment in the country. We, here, discuss in brief the significance of money in a capitalistic and centrally controlled economy. (a) Role of Money in a Capitalistic Economy:         Money is the sovereign queen of all delights. For her the teacher teaches, the lawyer pleads, the dancer dances, the soldier fights.       In a capitalistic economy, money is the pivot around which all economic activities cluster. Money is an indicator as well as a surveyor of wealth. The importance of money can be judged from the powerful influence which it exercises on the (1) Volume of production; (2) Direction of production; (3) Pattern of consumption; (4) Method of  distribution; (5) Direction and volume of exchange; and (6) Rate of saving and mi investment in the country. Production Decisions. Production has been greatly facilitated by the introduction of  money. Money makes possible the accumulation of wealth in those hands which are Able to organize the production. The captain of the industry hires the various factors ' of production in order to meet the future demand for goods and services and pays them in terms of money If the reward was to be paid in commodity, then the exchange of goods would have been very limited and so the production on a small scale Production without the use of money cannot be organized on a large scale and run efficiently and economically. The decision of what, where, when and how much to produce are all guided by the amount of money offered in exchange of goods and service. The cost of production is also estimated in terms of money. The profit or loss which is the difference between the sales proceeds and the total money cost is also expressed in terms of money. With the introduction of money. The consumption can be easily postponed and the assets can be stored for use to a future date. Exchange Transactions: In a moneyless economy, exchange of goods was a very inconvenient process. People used to face the difficulties of double coincidence of wants. There was also no common measure of value. The use of money has successfully removed the awkwardness of barter. Money, by acting as a medium of exchange, has greatly stimulated the exchange of goods. It splits up exchange process into two parts, sale and...
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