Answer #2

what is the role of money?
THE ROLE OF MONEY

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 purchase and thus facilitates flow of goods and services from producers to consumers.

Distribution of National Dividend: The four factors of production, combining %y together, produce a net aggregate of commodities every year. The share of each factor of production i.e., rent of land, wages of labor, interest on capital and profit to entrepreneur is paid in terms of money, if the share of each factor of production was to be paid by dividing joint products, it would have caused much inconvenience to each distributor. Imagine, a cloth producer paying the share of each factor of production in term of Cloth. As money is generally acceptable as a medium of “exchange and at the same time acts as a measure and a store of value, therefore, the distribution of national dividend through the medium of money greatly facilitates the processes of distribution. In the words of Jevon “Money subdivides and distributes properly and lubricates the activities of exchange”.

Money in the Field of Public Finance: Money renders a very valuable service in the field of public finance. Public Finance in recent times aims at increasing the rate of economic activities and reducing inequalities of income. It also acts as an instrument of economic and social justice in a country. Money helps the state in the achievement of these objectives. The government can easily raise revenue through the medium of money and can spend it for the betterment of the people.

Money in the Sphere of Banking: We know it very well that money serves as standard of deferred payments. The general confidence in the purchasing power of money makes it the chief farm of credit. The debtor can safely borrow money for consumption or for production purposes. This has led to the building up of a gigantic superstructure of banking and credit system.

Attainment of High Level of Production and Employment: The introduction of money in the economy has facilitated exchange. It has led to high degree of specialization and interdependence of economic units; If the money is properly managed, it ensures rising level of productions employment and real income in the

Country. In case, the delicate instruments is not properly handled, it leads to decline in the prices, output and job opportunities. We, thus, find that the behavior of employment, rate of output, level of price and distribution of national income are all directly related to the monetary forces.

Answered By: sanjay kumar [2 ]